There has been an interesting thing going on in the New York real estate market with respect to transfer taxes on the sale of new constructions or sponsor owned units. Typically in a residential real estate transaction the seller of a property assumes responsibility for paying the transfer taxes (in NYC this includes NYC real property tax and NYS real property tax) while the buyer would only be responsible for the so called “Mansion Tax” in the event the purchase price exceeds one million dollars.
However, in an never ending effort to recoup costs developers/sponsors are absolving themselves of paying transfer taxes by requiring that the buyer pay these costs at closing (check your Purchase Agreement carefully). While some may be attracted to buying a new construction because it is more modern or has the latest appliances, it is imperative that these buyers fully understand the tax implications early in due diligence/contracting stage of the transaction.
What do the numbers really look like?
Our firm was recently hired by a foreign buyer to conduct due diligence on a luxury apartment with an approximate purchase price of $3,000,000. What this purchaser did not realize at the outset was that in addition to traditionally expected closing costs, the sponsor was also requiring purchasers to pay the transfer taxes. The following is a breakdown of the tax liability that the seller was shifting to the buyer:
Purchase price: $3,000,000
NYS Transfer Tax: $12,340.00
NYC Transfer Tax: $43,957.69
Mansion Tax: $30,847.50
Therefore, in addition to the Mansion Tax, this buyer was facing an additional tax bill of $56,297.69. There is an important lesson here for a prospective buyer. While it won’t necessarily be granted, it is paramount that your attorney and real estate broker recognize these additional tax costs early in the negotiation process and make every effort to negotiate with the sponsor/developer.
The attached article, albeit from 2009, seems even more relevant as 421-a tax abatements are coming to an end. As such tax abatements are set to expire, unit owners will find themselves with larger tax bills which may interfere with an owners ability to satisfy common charge requirements. Naturally, this could lead to higher rates of owner defaults which in turn could force non-defaulting owners to pick up the tab. Before closing on a real estate transaction, your attorney should diligently review both building financial statements and building minutes to ensure that there are no significant owner defaults. Just remember, hiring a “budget” attorney who fails to carry out proper due diligence could end up costing you significantly in the long run! http://www.nytimes.com/2009/02/08/realestate/08COV.html?pagewanted=1&_r=3&em&