N.Y.’s Actual Property Switch Tax, The 2022 Finances, And Accountable Particular person Legal responsibility | Rivkin Radler LLP

Not Just Income Tax

Approximately two weeks ago, Gov. Cuomo and the New York State Legislature agreed upon a budget for the State’s 2021-2022 fiscal year. Although most businesses and their owners have understandably focused their attention on the increased personal and corporate income taxes[i] enacted under the budget legislation, there are several other provisions of which they should not lose sight.[ii]

Among these are the changes to the State’s real estate transfer tax (“RETT”).[iii] “Real estate transfer tax?” you may ask. Isn’t the tax a relatively minor cost[iv] associated with the sale of real property located within the State?

Yes and no.[v] Yes, the tax is triggered upon the sale or other “taxable conveyance” of New York real property and, yes, the rate at which it is imposed is relatively small. No, the tax is not limited to the sale of real property.

Regardless of how businesses and investors may view the RETT, the Governor and the State Legislature deem it important enough to have included in the 2021-2022 budget legislation a provision that is intended to ensure the proper assessment, remittance, and collection of the tax.

Before discussing these recent changes to the RETT, and to better appreciate their impact, a brief review of the statute may be in order.


In general, the tax is imposed on each taxable conveyance of New York real property, or of an interest in such property, at the rate of 0.40 percent of the consideration paid for the conveyance.[vi]

However, for taxable conveyances of real property in New York City made on or after July 1, 2019, a RETT rate of 0.65 percent will apply (i) to a conveyance of commercial real property with a sales price of at least $2 million, and (ii) to a conveyance of residential real property with a sales price of at least $3 million.

What is a Taxable Conveyance?

All conveyances of real property are presumed taxable for purposes of the RETT.[vii]

A conveyance includes any sale or exchange of real property,[viii] as well as any sale or exchange of any “interest” in real property. An interest in real property includes a title in fee, a leasehold interest, and the transfer of a controlling interest in an entity that has an interest in real property.[ix]

Thus, common situations in which the RETT must be considered include the contribution of real property to a business entity in exchange for equity therein; the distribution of real property to the owners of a business, whether in liquidation of the business or of a particular owner’s equity therein; the merger of two business entities one of which owns an interest in real property.[x]

The creation of a lease is a taxable conveyance where (a) the sum of (i) the initial term of the lease, plus (ii) any renewal terms, exceeds 49 years, (b) substantial capital improvements are or may be made for the benefit of the lessee, and (c) the lease is for substantially all[xi] of the premises.

The creation of a lease that is coupled with the granting of an option to purchase the leased real property (regardless of the lease term) is also a taxable conveyance.[xii]

The transfer of an existing leasehold interest (regardless of the remaining lease term), or the granting of an option to buy real property, are both taxable conveyances for which the consideration is the amount paid by the buyer.[xiii]  If the lessor pays an amount to the lessee to surrender a lease, the consideration is the amount paid. However, no tax is imposed when the lessee pays the lessor to get out of a lease.

Controlling Interest

In the case of an entity that has an interest in real property, the transfer or acquisition of a “controlling interest” occurs when a person or group of persons “acting in concert,” transfer or acquire: in the case of a corporation, either 50% or more of the total combined voting power of all classes of stock, or 50% or more of the capital, profits or beneficial interests in such voting stock; and, in the case of a partnership, 50% or more of the capital, profits or beneficial interests in such partnership.[xiv]

The value of the entity’s interest in real property relative to the value of the entity’s other assets is irrelevant.[xv]

Generally speaking, where there is a transfer or acquisition of an interest in an entity that has an interest in real property and, within three years thereof, there is a transfer or acquisition of an additional interest or interests in the same entity, the transfers or acquisitions will be added together to determine if a transfer or acquisition of a controlling interest has occurred.[xvi]

What is Consideration?

In general, “consideration” means the price actually paid or required to be paid for the real property or the interest therein, whether paid or to be paid by money, property, or any other thing of value, including stock in the buyer. When the consideration includes property other than money, the consideration is deemed to be the fair market value[xvii] of the real property or interest therein.

It includes the cancellation or discharge of a debt or obligation, as well as the amount of any mortgage or any encumbrance on the real property, regardless of whether the underlying indebtedness is assumed or taken subject to.[xviii]

No exclusion is made by reason of deferred payments of the purchase price, whether represented by notes or otherwise; there is no installment reporting for the RETT.[xix]

In the case of the transfer of a controlling interest in any entity that owns real property, “consideration” means the fair market value (gross, not net) of the real property, apportioned based on the percentage of the ownership interest transferred.[xx]

In the case of the creation of a lease which constitutes a taxable conveyance, the consideration used to compute the tax is the present value of the right to receive rental payments or other payments attributable to the use and occupancy of the real property, including rental attributable to any renewal terms.[xxi]


The grantor and the grantee must file a joint transfer tax return for each conveyance.[xxii]  If the conveyance is to be recorded (e.g., a deed), the return must be filed with the appropriate county’s recording office; any tax due may also be remitted there.[xxiii]

If the conveyance is not recorded (e.g., a sale of stock – a controlling interest), the return must be filed with, and the tax paid to, the State.

In either case, both the seller and the buyer are required to sign the return,[xxiv] which is due – together with the tax – no later than the 15th day after the delivery of the instrument effecting the conveyance by the grantor to the grantee.[xxv]

The 2021-2022 Budget[xxvi]

The real estate transfer tax is generally payable by the grantor; in other words, by the person making the conveyance of real property (or of the interest therein).[xxvii]

If the grantor fails to pay the tax timely, then the person who acquired the real property in the conveyance (the “grantee”) must pay the tax; in that case, the tax becomes the joint and several liability of the grantor and the grantee,[xxviii] though the budget legislation provides the grantee a cause of action against the grantor for the recovery of any tax, interest and penalties paid by the grantee under these circumstances.[xxix]

To ensure payment, and facilitate collection, of the RETT arising from a particular conveyance, the budget legislation also expands, beyond the grantor and the grantee, the persons that may be held liable for the RETT by adding “responsible person billing” – i.e., personal liability – to the RETT law.[xxx]

Specifically, the budget redefines the term “grantor”[xxxi] to include not only the grantor-entity that conveyed the real property or the intertest therein, but also any individual, corporation, partnership or limited liability company, or an officer or employee of any corporation (including a dissolved corporation), or  a member or employee of any partnership, or a member, manager or employee of a limited  liability company, who as such officer, employee, manager or member was under a duty to act for such corporation, partnership, limited liability company or individual proprietorship in complying with any requirement of the RETT.[xxxii]

The foregoing change will take effect on July 1, 2021 and applies to conveyances occurring on or after such date.[xxxiii]

However, before the State may seek payment of the tax from among any of the newly designated “grantors,” it must first determine whether such person was “under a duty to act” on behalf of the actual grantor in complying with the requirements of the RETT.

Under a Duty to Act

Only those persons who were under a duty to act on behalf of the grantor with respect to the taxable conveyance in question may be assessed the tax. The amended RETT law, however, does not define the term “under a duty to act.”

Notwithstanding this omission, the interpretation of the term in the context of other taxes (for example, the sales tax) should provide some helpful guidance.

Thus, the determination of whether an individual is a person under a duty to act for a grantor-business will be based on a close examination of the particular facts of the case. The main inquiry should be whether the person in question had sufficient authority and control over the affairs of the grantor. Merely serving as an officer or employee of the grantor should not, in and of itself, warrant the imposition of personal liability for the RETT.

Generally, a person who is authorized to sign a grantor’s tax returns, or who is responsible for maintaining the grantor’s books, or who is responsible for its management, is probably under a duty to act.[xxxiv]

Among the other factors to be considered are whether the person was authorized to write checks on behalf of the grantor or had knowledge of and control over the grantor’s financial affairs.

If it is determined that the person in question had sufficient authority and control over the grantor’s affairs to be considered a responsible person for purposes of the RETT – whether as an officer, employee, or owner – then they will be subject to the State’s authority to collect any delinquent RETT.

What’s Next?

The brief review of the RETT, presented above, should highlight the potential application of the tax to many common business scenarios that involve the direct or indirect transfer of an interest in real property, whether by sale, exchange, capital contribution, current or liquidating distribution, merger, sale of stock or of partnership interests, creation or assignment of a lease, or otherwise.

In some of these situations, a party may be tempted to “avoid” the RETT or to improperly reduce the amount of taxing owing.[xxxv] For example, how many times has a taxpayer intimated that they may not report the sale of a controlling interest because there is no requirement or need to record a deed? Even after you have explained to them that the New York S corporation and partnership tax returns, for example, request information regarding the entity’s ownership of real property in New York during the last three years, and whether there has been a transfer or acquisition of a controlling interest in the corporation or partnership during those years?[xxxvi]

The introduction of the “responsible person” concept to the enforcement of the RETT should cause those individuals, who are likely “under a duty to act” on behalf of a business, to treat the tax with more respect – the risk of personal liability for a tax that is imposed upon, and should be borne by, a business entity should have a salutary effect upon the reporting of any taxable conveyance, the accurate description of such conveyance (including the fair market value of the real property interest and of the consideration paid), and the payment of the resulting tax.

Time will tell.

By the same token, truly “passive” investors should think twice about asking for a “seat at the table” or for some official-sounding title. They should also consider whether their shareholder or partnership/operating agreements afford them enough protection against potential claims by the State with respect to the RETT.[xxxvii]

[i] The corporate tax rate was temporarily increased from 6.5% to 7.25% for taxpayers with a business income base greater than $5 million. The increase applies to taxable years beginning on or after January 1, 2021; it sunsets (I hope) for taxable years beginning on or after January 1, 2024.
[ii] There were also several proposed changes that were not enacted, including, for example, a proposed increase in the maximum estate tax rate from 16% to 20%. It behooves us all to track these proposals. Mr. Cuomo won’t be around forever, and his successor may be more amenable – whether from a political or a philosophical bent – to support the enactment of this and other tax provisions.
[iii] Article 31 of the New York Tax Law.
[iv] By contrast, the New York City Real Property Transfer Tax is anything but a “minor” cost; for example, the City’s tax rate for transfers of commercial properties with a value greater than $500,000 is 2.625%.
[v] If you are expecting something approaching tax metaphysics, I am sorry to disappoint you.
[vi] NY Tax Law Sec. 1402. The rate may be expressed as $4 of tax for every $1,000 of consideration.

In NYC, the rate is 2.625% of the consideration where the consideration is more than $500,000; otherwise, the rate is 1.425%.
[vii] The statute exempts conveyances by certain “grantors” from the tax; for example, the government. (Charitable organizations are not exempted from the RETT; the City, however, provides an exemption for Sec. 501(c)(3) organizations from its real property transfer tax.) The statute also provides exceptions for certain transfers; for example, a transfer that does not change the beneficial ownership of the property (a “mere change” in form).
[viii] Including a like kind exchange of real properties that is exempt from income tax under IRC Sec. 1031.
[ix] Thus, a transfer of stock or of a partnership interest may trigger the tax.
[x] 20 NYCRR 575.11. https://govt.westlaw.com/nycrr/Document/I50f3589ccd1711dda432a117e6e0f345?viewType=FullText&originationContext=documenttoc&transitionType=CategoryPageItem&contextData=(sc.Default) .
[xi] 90% or more of the total rentable space, exclusive of common areas.
[xii] This will often occur where the seller of a business retains ownership of the real property out of which the business operates.

The consideration in that case is the present value of the rental payments plus the amount paid for the option.
[xiii] 20 NYCRR 575.7(c). Consideration does not include the present value of the remaining rental payments required to be made.

Query the value of a lease that reflects arm-length terms? There is likely no bargain element to which value may be assigned. Where an ongoing business is sold, look at the Asset Acquisition Statement on IRS Form 8894 – how much of the purchase price is allocated to the lease?
[xiv] NY Tax Law Sec. 1401(b). Persons are acting in concert when they have a relationship such that one person influences or controls the actions of another. Where they are not commonly controlled or owned, persons will be treated as acting in concert when the unity with which the sellers or purchasers have negotiated and will consummate the transfer of ownership interests indicates they are acting as a single entity. 20 NYCRR 575.6.
[xv] This should be contrasted with FIRPTA (IRC Sec. 897), under which a transfer of corporate stock is subject to the FIRPTA tax and withholding only where the corporation is a “U.S. real property holding corporation” — in general, where the corporation’s U.S. real property exceeds 50% of the total fair market value of the corporation’s assets.
[xvi] 20 NYCRR 575.6(d).
[xvii] “Fair market value” means the amount that a willing buyer would pay a willing seller for real property. It is generally determined by an appraisal based upon the value of the real property at the time of conveyance. It is not “net” fair market value, which is fair market value less the amount of any mortgages on the property. 20 NYCRR 575.1(l).
[xviii] NY Tax Law Sec. 1401(d).
[xix] By contrast, depending upon the property sold, the deferred receipt of the purchase price allows the seller to defer recognition of the gain attributable to the deferred amount. IRC Sec. 453. Of course, deferral also carries a credit risk.
[xx] 20 NYCRR 575.1(d)(4).
[xxi] The present value is determined using 110% of the mid-term Applicable Federal Rate (“AFR”; see IRC Sec. 1274), and this discount rate is applied to “net rents” (taking operating costs into account).  NY Tax Law Sec. 1401(d); 20 NYCRR 575.1(d)(2), 575.7(b)(2).
[xxii] NY Tax Law Sec. 1409; 20 NYCRR 575.14.

Returns must be preserved for at least three years.
[xxiii] Form TP-584 is used for conveyances of real property located outside the City; TP-584-NYC is used for conveyances in the City.
[xxiv] NY Tax Law Sec. 1409; 20 NYCRR 575.14(e).
[xxv] NY Tax Law Sec. 1410; 20 NYCRR 575.14(b) and (c).
[xxvi] S.2509-C, A.3009-C.
[xxvii] NY Tax Law Sec. 1401(g), Sec. 1404.

Where the conveyance consists of a transfer or an acquisition of a controlling interest in an entity with an interest in real property, “grantor” means the entity with an interest in real property or a shareholder or partner transferring stock or partnership interest, respectively.
[xxviii] For example, the seller and the buyer, respectively. NY Tax Law Sec. 1404(a); 20 NYCRR 575.4.
[xxix] Part O, Section 2.
[xxx] FY 2022 New York State Executive Budget, Memorandum in Support. https://www.budget.ny.gov/pubs/archive/fy22/ex/artvii/revenue-memo.pdf .
[xxxi][xxxi] The budget amends the definition of “person,” but in doing so also amends the definition of “grantor.” NY Tax Law Sec. 1401.
[xxxii] Part O, Section 1.  https://nyassembly.gov/leg/?default_fld=%0D%0A&leg_video=&bn=A03009&term=&Summary=Y&Actions=Y&Memo=Y&Text=Y .
[xxxiii] Part O, Section 5. Other than conveyances that are made pursuant to binding written contracts entered on or before April 1, 2021, provided that the date of execution of such contract is confirmed by independent evidence, such as the recording of the contract, payment of a deposit, or other facts and circumstances as determined by the Commissioner of Taxation and Finance.
[xxxiv] Actual, rather than titular, authority should be paramount.
[xxxv] The five-letter verb beginning and ending with “e” – e _ _ _ e” – that should not break through the fence of any tax adviser’s teeth, to paraphrase Homer.
[xxxvi] See the first page of CT-3-S and of IT-204, respectively.
[xxxvii] Not to mention the sales tax and employment taxes.