Fernando Branco, Real Estate Broker
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Fernando Branco Realty - 162 Huntington St, Brooklyn NY 11231
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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
I 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 price. 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
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February 18, 2016 Q: I am a licensed real estate salesperson and I am representing a purchaser who is considering a co-op apartment in a building that has a Ground Lease. Can you please clarify exactly what a Ground Lease is? Also, are there any particular considerations that should be made before purchasing a co-op apartment in a building that has a Ground Lease? A: If a co-op building has a Ground Lease (also known as a Land Lease) it means that the co-op corporation does not own the land under the building. Rather, the co-op corporation leases the land from the owner of the land. About 100 buildings in Manhattan have Ground Leases, many of which are co-ops. Generally the terms of Ground Leases are quite long, varying from terms of 50 to 99 years. Several important considerations should be made before purchasing a co-op apartment in a building with a Ground Lease: Can the rent payable by the co-op corporation increase during the term of the Ground Lease? If the re