On April 19, Governor Andrew Cuomo signed into regulation the New York Funds Invoice for the 2021-2022 state fiscal yr (Senate Invoice S2509C) (the New Funds Invoice). The New Funds Invoice incorporates a serious change to the legal responsibility provisions for New York State’s actual property switch tax (RETT).
Usually, the RETT is imposed on all conveyances of actual property or pursuits of actual property when the consideration exceeds $500. N.Y. Tax Regulation. § 1402(a). The legal responsibility for the RETT is imposed on the grantor, but when the grantor fails to pay or is exempt from the tax, the tax is levied on the grantee. N.Y. Tax Regulation §1404(a). For functions of the RETT, the grantor is outlined as “the particular person making the conveyance of actual property or curiosity therein.” N.Y. Tax Regulation § 1401(g).
The New Funds Invoice expanded the definition of “particular person” to incorporate any particular person, company, partnership or restricted legal responsibility firm (LLC), or an officer or worker of any company (together with a dissolved company), or a member or worker of any partnership, or a member, supervisor or worker of an LLC, who as such officer, worker, supervisor or member is underneath an obligation to behave or has so acted for such company, partnership, LLC or particular person proprietorship in complying with the RETT legal guidelines. N.Y. Tax Regulation § 1401(a)(2); S.B. S2509C, Pt. O, §1. Beforehand, this legal responsibility was restricted to people, entities and different individuals who had been appearing in a fiduciary or consultant capability of the grantor. N.Y. Tax Regulation § 1401(a)(1).
The New Funds Invoice additionally explicitly states that until the events contractually agree in any other case, the RETT is paid by the grantor and is “to not be payable, instantly or not directly, by the grantee.” S.B. S2509C, Pt. O, §2. Whereas the RETT provisions nonetheless preserve that the grantee may be held responsible for the RETT, if the grantor has did not pay the RETT when due, or if the grantor is exempt from paying the tax, in such situations, nonetheless, the New Funds Invoice will present the grantee a statutory reason behind motion in opposition to the grantor for restoration of the fee of the RETT (together with curiosity and penalties). S.B. S2509C, Pt. O, §2.
These provisions within the New Funds Invoice will apply to all conveyances occurring on or after July 1, until the conveyances made are pursuant to a binding written contract entered into on or earlier than April 1.
The New Funds Invoice expands the quantity and sort of individuals who may be held responsible for the RETT and thus raises many questions and potential considerations. As an illustration, if there’s a foreclosures of a property, and the foreclosing financial institution pays the RETT, might the foreclosing lender make the most of its rights of motion to carry a person supervisor of the bancrupt grantor entity personally responsible for the RETT? Primarily based upon a strict studying of the New Funds Invoice, it seems that the reply is “sure.” It’s also unclear how the New Funds Invoice would apply to tiered possession and administration constructions, and whether or not the brand new regulation can “pierce the veil” and maintain particular person managers of entities a number of ranges above the grantor entity responsible for the RETT. This query is especially extra acute with respect to “off report” transactions reminiscent of sure higher tier fairness transfers or surrenders of leasehold estates, the place no paperwork are recorded and the place the RETT could also be due, however a switch tax return shouldn’t be filed because of the events’ failure to fulfill the submitting requirement. Moreover, though New York Metropolis has not handed an analogous growth in its legal responsibility legal guidelines relating to the New York Metropolis Actual Property Switch Tax (RPTT), ought to New York Metropolis go an analogous set of legal guidelines, there will probably be extra switch tax publicity for these similar people topic to the New Funds Invoice.
The chief concern with respect to the New Funds Invoice, nonetheless, is that the brand new regulation expands private legal responsibility with out offering a lot wanted and lengthy sought steerage on tips on how to apply the RETT in transactions which can be extra difficult than a easy conveyance of property. Actual property joint ventures will usually contain difficult revenue and loss allocations between the events, such that if there are fairness transfers on the higher tiers, it isn’t all the time clear that the RETT is due. Inexpensive housing transactions are notably in danger as a result of they usually contain difficult waterfalls but have restricted financial assets to pay switch taxes ought to filings be decided to have been made incorrectly. Furthermore, title insurance coverage protection shouldn’t be out there to insure in opposition to the chance of publicity, if it finally seems that the RETT was due on a sure transaction. With out offering clearer steerage on tips on how to apply the RETT legal guidelines to a majority of these transactions, it provides extra strain on the events concerned to resolve any RETT ambiguities, which is probably going so as to add time and prices and should end in a chilling impact on actual property transactions.