current issues and ideas for clients
NEW YORK STATE REAL ESTATE TRANFER TAXE
AND "MANSION" TAX SOON TO INCREASE SIGNIFICANTLY
Effective as of July 1, 2019, the existing New York State Real Estate Transfer Tax will be increased and a supplemental tax added to the existing so-called "Mansion" Tax.
The Transfer Tax, currently imposed upon the grantor at a rate of $2.00 for each $500.00 (or fractional part thereof) of consideration for the real estate transferred will increase to $3.25 for each $500.00 (or fractional part thereof) of consideration on all transactions involving the transfer of (1) residential real property, defined as a 1 - 3 family home, cooperative apartment or condominium unit which may be used, in whole or in part, as a personal residence, when the consideration is $3,000,000.00 or more, or (2) any other property when the consideration is $2,000,000.00 or more.
In addition to the "Mansion" Tax currently imposed upon the grantee on the transfer of residential real property (as defined above) at a rate of one percent (1%) of the consideration when the consideration is $1,000,000.00 or more, a new supplemental "Mansion" Tax will be imposed at the following rates:
REAL ESTATE INVESTMENT IN OPPORTUNITY ZONES
MAY SIGNIFICANTLY REDUCE TAX ON CAPITAL GAINS
The Firm has counseled its real estate investment clients on creative tax strategies for many decades, including transactions structured to qualify for favorable tax treatment under Section 1031 of the Internal Revenue Code, and is always exploring new methods for realizing favorable tax treatment.
The Tax Cuts and Jobs Act, passed on December 22, 2017, created the Qualified Opportunity Zone program under I.R.C. Sections 1400Z-1 and 1400Z-2, making investments in qualified Opportunity Zones, specifically-designated, economically-distressed communities, eligible for preferential tax treatment. A taxpayer does not need to reside in the qualified Opportunity Zone to qualify. Under these new provisions of the Internal Revenue Code, investors may defer payment of the tax on gains realized from the sale of an asset (which, unlike IRC 1031 tax deferred exchanges, includes gain realized from the sale of a business, stocks or other assets as well as real estate), to the extent such gain is timely reinvested in a qualified opportunity fund ("QOF") that acquires, directly or indirectly, within 180 days after the sale or exchange of such asset, property located within an Opportunity Zone, which the taxpayer must substantially improve (i.e., increase its adjusted basis by 100% or more) within the 30 month period following its acquisition. Payment of tax on such gain is deferred until the earlier of the sale or exchange of that investment or December 31, 2026.Depending upon the period of time the investor holds such investment in the QOF, the investor is entitled to a step up in basis, resulting in a 10%-15% reduction in the tax payable on those gains. Last, and certainly not least, if the investment in the QOF is held by the investor for at least 10 years, the investor may be entitled to a step up in basis to fair market value at the time of its sale or exchange such that all gain with respect to the appreciation of the property while held is eliminated. As of June 2018, the U.S Treasury Department designated Opportunity Zones in all 50 states, five territories, and the District of Columbia, which includes many areas within the five boroughs of the City of New York. We believe that these new tax provisions may provide real estate investors with one of the best opportunities in many years for the potential reduction or elimination of taxes. As typical, further guidance, rules, and regulations are needed to better clarify various aspects of the new program and the Firm continues to monitor and study related developments and commentary. Since strict time limits apply to certain of the requirements, to learn more about how the Firm can assist the taxpayer in taking advantage of these new tax provisions, it is recommended that you contact partner, Zachary S. Goldberg, Esq. without delay.
UPDATE (October 19, 2018): The IRS has issued proposed regulations that provide guidance for the Opportunity Zone Program relating to gains that may be deferred as a result of a taxpayer's investment in a QOF. We will be reviewing these proposed regulations and following the results of the public hearing scheduled for January 10, 2019 at 10:00 a.m. The proposed regulations may be downloaded here.
UPDATE (April 12, 2019): A public hearing on the IRS's first tranche of proposed regulations was held in mid-February before an overflow crowd. In mid-March, the IRS transmitted a second tranche of proposed regulations to the White House which will soon be released for review and then become the subject of a public hearing. These newly proposed regulations will hopefully address some of the many open issues raised in response to the initial set of regulations so that investors may pursue these investment opporutunities without the uncertainty which currently surrounds them.
UPDATE (April 18, 2019): On April 17, 2019, the Treasury Department released its long-awaited second set of proposed regulations that provide further guidance for the Opportunity Zone Program. These regulations address various issues, including: the definition of “substantially all” in each of the various places it appears in section 1400Z-2; the transactions that may trigger the inclusion of gain that a taxpayer has elected to defer under section 1400Z-2; the timing and amount of the deferred gain that is included; the treatment of leased property used by a qualified opportunity zone business; the use of qualified opportunity zone business property in the qualified opportunity zone; the sourcing of gross income to the qualified opportunity zone business; and the “reasonable period” for a QOF to reinvest proceeds from the sale of qualifying assets without paying a penalty. We will be reviewing these proposed regulations and following the results of the public hearing scheduled for July 9, 2019 at 10:00 a.m.
GEOGRAPHIC TARGETING ORDERS
Clients should be aware that, under a Geographic Targeting Order recently issued by the Financial Crimes Enforcement Network of the U.S. Treasury, title companies will temporarily be required to report certain information concerning the individuals behind a company (e.g., a limited liability company) that purchases, on an "all-cash" basis, "high-end" residential real estate in the Borough of Manhattan (a similar GTO has also been issued for Miami-Dade County, Florida). Such reporting will be required where any entity purchases residential real property, including an individual condominium or cooperative unit designed principally for the occupancy of one-to-four families, located in the Borough of Manhattan, when the purchase price exceeds $3,000,000, and is made without a bank loan. In such cases, the title company must submit an IRS Form 8300/FinCEN Form 8300 to the Treasury Department containing the identity of all LLC members and its representative(s) (e.g., its managers) and their respective addresses and identification numbers, together with a copy of their driver's license, passport, or similar identification. This regulation, effective as of March 1, 2016, has been periodically extended without lapse. For more information, contact partners, Zachary S. Goldberg, Esq. or Paul M. Corwin, Esq.
DEFERRAL OF GAIN ON SALE OF PRIMARY RESIDENCE
Clients selling a residence may qualify for special treatment so as to avoid paying income tax on the first $250,000.00 (for individual taxpayers) or $500,000.00 (maried taxpayers) of gain. Clients contemplating disposing of appreciated real property which has been held for investment or used in connection with a trade or business with the intent of reinvesting the proceeds in other real property should take advantage of the like-kind exchange provisions of Section 1031 of the Internal Revenue Code to defer payment of the capital gains tax otherwise payable on such disposition. For more information on either of these tax-saving opportunities, or even better, for advice on implementing a strategy which will take full advantage of both, contact partner, Zachary S. Goldberg, Esq.
GIFTING PLANS TO REDUCE ESTATE TAXES
Individual clients may well be advised to take advantage of specific provisions of the Internal Revenue Code which allow for tax-free gifts to be given immediate family members as a method for reducing federal and state inheritance taxes. For more information, contact partner, Paul M. Corwin, Esq.