How has NYS Gains tax changed for filers?

Real Estate Weekly, May 26, 1993 by Larry Weiser

Important changes to the New York State Real Property Transfer Gains Tax (commonly referred to as the "gains tax" or the "Cuomo tax") are effective for transactions on or after April 15, 1993. The changes were contained in the New York State budget bill enacted by the Legislature in early April, 1993. Owners developers and professionals filing gains tax returns should be aware of these changes as the computation of gain subject to tax will substantially be affected.

For transfers of real property to lending and other secured parties in a foreclosure or deed-in-lieu transaction, "consideration" will be limited to the fair market value of the property transferred. Under prior law, "consideration" included the amount of any mortgage assumed or taken, subject to the cancellation or discharge of an indebtedness, even where the debt exceeded the fair market value of the property. Also, under the new provisions, a mortgagee will generally be relieved from gains tax liability if the property is acquired through a deed-in-lieu transaction.

The budget bill also amends the definition of original purchase price ("OPP") which is subtracted from consideration in computing gain subject to gains tax. OPP now includes the following costs:

*Marketing Costs - Any reasonable and necessary advertising and marketing costs not included in customary brokerage fees paid by the transferor will be allowed as an allowable selling expense. Under prior law, legal, engineering add architectural fees incurred to sell the property were the only allowable selling expenses.

*Mortgage Recording Taxes - OPP will now include all mortgage recording taxes paid by a seller upon acquisition of the property or to construct a capital improvement. Under prior law, a portion of the mortgage recording tax was disallowed to the extent of an available credit against personal income taxes.

*Interest on Acquisition Loans - Interest on loans used to acquire property during the construction period will now be able to be included in computing OPP. Under prior law, interest on loans during the construction period was to be included only to the extent that the proceeds of such loans were used for capital improvements.

*Section 421-A Costs - OPP shall include costs incurred by the seller to obtain a full or partial real estate tax exemption available under Section 42 1 - A of the real property tax law.

Sponsors of cooperatives and condominiums should be aware that a portion of these costs previously incurred will now be permitted to be included in their OPP computation on a prorated basis for sales of units after April 15, 1993.

Lastly, the bill amends the penalty provisions to conform more closely to the corporate tax provisions. Different penalties will be imposed depending on the nature of the misconduct. Penalties are separately stated for (a) failure to file a tentative assessment and return or failure to pay the amount shown within the time required, (b) failure to pay any amount of tax not shown on a tentative assessment within 10 days of notice and demand, (c) failure to pay tax not shown on a tentative assessment that is attributable to negligence or intentional disregard of the rules and regulations and (d) substantial understatement of tax. Certain of these penalties may be abated entirely or in part if reasonable cause is shown.

Larry Weiser, a partner in Friedman Alpren & Green, specializes in the tax and accounting aspects of residential real estate ownership, development and conversion. He is significantly involved with all aspects of the New York State Real Properly Transfer Gains Tax.

Friedman Alpren & Green has responded to inquiries regarding previous articles and is pleased to discuss these and other tax questions posed by the readers of Real Estate Weekly. Any such questions should be directed to their office at 1700 Broadway, New York, New York.