Thursday, July 11, 2013

Legal Line Question of the Week: Transfer Taxes and Grossed up Consideration

Legal Line Question of the Week - REBNY
Transfer Taxes and Grossed up Consideration
QuestionI represent the prospective purchaser of a new construction condominium 
unit. In speaking with the sales office for the sponsor, I was informed that 
my purchaser is responsible for paying both the New York City and 
New York State transfer taxes.  I thought that the obligation to pay transfer 
taxes was the responsibility of the seller.  Can you please explain?
Generally, when real property (or a co-op apartment) is sold in New York 
City, the seller is responsible for paying both the New York State and 
New York City transfer taxes.  In residential real estate transactions 
where the purchase price is greater than $500,000, the New York City 
transfer tax equals 1.425% of the purchase price (and where the purchase 
price is $500,000 or below, the New York City transfer tax is 1% of the 
purchase price).  The New York State transfer tax is .4% of the purchase 
New York state law permits a seller to shift the burden of paying transfer 
taxes to a purchaser.  Often times, the sponsor in new construction deals 
will shift the burden of paying transfer taxes to a purchaser. The obligation 
of a purchaser to pay the seller’s transfer taxes must be set forth in the 
contract of sale entered into by the parties.

Important Tip:When a purchaser pays the seller’s transfer taxes, the amount 
of the transfer taxes paid by the purchaser is then added to the 
purchase price and the transfer taxes are then calculated on what is 
called the “grossed up consideration.”  By way of example, if the 
purchase price is $1,000,000 and the seller pays the transfer taxes, 
then the seller will be responsible for $14,250 in New York City 
transfer taxes and $4,000 in New York State transfer taxes.  
However, in a situation where the purchaser pays the seller’s 
transfer taxes, the combined $18,250 in transfer taxes are 
added to the purchase price and then the transfer taxes are 
recalculated using the grossed up consideration amount of $1,018,250.  

The issue of “grossed up consideration” is very important when the purchase 
price approaches $1,000,000.  If the consideration (or grossed up 
consideration) is $1,000,000 or more, then the purchaser will be required 
to pay what is commonly referred to as the “Mansion Tax”.  
The Mansion Tax equals 1% of the consideration and is generally 
the responsibility of the purchaser. Accordingly, real estate brokers 
should be aware of the transfer tax implications when the purchase 
price is close to $1,000,000 and the purchaser agrees to pay the seller’s 
transfer taxes.  Towards that end, even if the purchase price was initially 
less than $1,000,000, if the purchaser agrees to pay for the sponsor’s 
transfer taxes, then the grossed up consideration could increase 
to $1,000,000 or more, thereby implicating the Mansion Tax.

By: Neil B. Garfinkel, 
REBNY Broker Counsel
Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP