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Foreclosures are everywhere, yet ironically, so are new constructions. In the more "happening" boroughs like Brooklyn and Manhattan, condominiums are being squeezed into every crevice and corner to accommodate trendy, urban sophisticates. The look and feel of familiar neighborhoods and landscapes are changing dramatically for the better, and so should our understanding of the unique tax requirements associated with these type properties. 

 

New constructions yield different tax scenarios depending on the type of transaction. Typically, it is the purchaser who pays the transfer tax ' not the seller. But in actuality, who pays whom and how much is totally dependent on who the parties are in the transaction, how many purchasers are involved, and even how many units. This article will examine a few of these scenarios so you are sufficiently familiar when the time comes. 

 

Purchasing from a Non-Sponsor 

 

Section 339-ee of the Real Property Tax Law states that sponsors of newly constructed projects can obtain credit for part of the mortgage recording tax paid on the loan taken to finance the construction of the project. However, the sponsor must 'qualify' for the credit which will only take effect if 1) the loan on which he paid the previous mortgage recording tax was a bonafide 'construction mortgage' and 2) if the first condo unit is sold within two years of the payment of said taxes. If he does qualify for the credit, he will receive it at closing and provide the title company with a 339-ee affidavit for recording. In actuality, the credit referred to is simply a portion of the mortgage tax typically forwarded to the New York City Department of Finance (DOF). The purchaser of the property cuts two checks totaling the appropriate percentage amount of the mortgage tax. One portion is allotted to DOF and the other portion to the sponsor. The amount provided to the sponsor is calculated based on several factors involving the building's common elements. 

 

Example: Purchaser takes out a $400,000.00 mortgage to purchase a $1,000,000.00 condo in Brooklyn, NY. Mortgage tax on that deal is calculated at 1.8% which yields $7200.00 (minus $30.00). Previous negotiations having to do with the common elements, etc. will result in a specific dollar figure being awarded to the sponsor. If that figure is $1000.00, then the purchaser would pay a total of $6,170.00 to the DOF, and $1,000.00 to the sponsor. 

 

Purchasing from a Sponsor 

 

If the purchaser is buying directly from the sponsor, the tax calculations will involve both the New York State transfer tax and the New York City transfer tax. As previously mentioned, transfer taxes, in the case of new constructions, are typically paid by the purchaser. This is always negotiable, but what isn't negotiable, is the method of grossing up the taxes to satisfy City and State requirements if the taxes are being paid by the purchaser. In the process of grossing up, both the state transfer tax amount and the city transfer tax amount are added to the purchase price. The actual transfer tax amounts submittable to DOF are then calculated based on the new purchase price. 

 

Example: Using the previous figures, both the $4,000.00 state transfer tax and the $14,250.00 transfer tax owed to the city would be added to the $1,000,000.00, for a new purchase price of $1,018,250.00. The new grossed up transfer taxes would be $4073.00 to the state and $14,510.06 to the city. A 1% mansion tax of $10,182.50 (on the grossed up purchase price) is also paid to the state.

 

Purchasing in Bulk 

 

When purchasing several units simultaneously from a sponsor or non-sponsor, sellers are expected to pay transfer taxes to the City based on the higher commercial rate (2.625%) for the sale of multiple condo units in a single bulk transaction. Per the New York Law Journal, the situation has sparked several debates and court cases so much so that the City now recognizes as individual residences deserving the residential rate of 1.425%, those bulk units that have been issued a single certificate of occupancy stating too that the residential rate would apply in certain circumstances if multiple units had been physically combined at closing. The Journal also cited several cases argued before the New York City Tax Appeals Tribunal that have 'moved the debate even closer to reality and further away from the City's position,' and seems to indicate a willingness on the part of the Appeals Tribunal, and perhaps ultimately, the City, to consider each case on an individual basis. 

 

Purchasing and Flipping 

 

In a 'flip' a condo unit is sold to a second party while being assigned directly to a third party simultaneously for an additional dollar amount. In some cases, the first party (sponsor) may not even be aware of the assignment until the day of closing. In any case, the State requires transfer taxes on the entire proceeds of the sale, however, the City will only request transfer taxes on the first half of the transaction between the first party and the second party. 

 

In conclusion, most of us will agree that it is a buyer's market with major diversity in inventory. Among the inventory is a rash of newly constructed condominium units that are as attractive financially as they are physically. It would behoove the real estate industry, therefore, to prepare for the anticipated transactions via complete familiarization with the tax requirements that comes standard with every unit. 

 

Leisa Premdas