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