By now almost everyone is familiar with the transfer taxes imposed by the City and the State on sales of real property or co-operative apartments. However, not everyone knows that non-residents must also pay a tax on their gain at the time of closing. This can lead to a delay in the closing by unaware sellers.
The procedure by which transfer taxes are paid and transfer documents are recorded is the execution and subsequent filing of the New York City Real Property Transfer Tax Return and the New York State Combined Real Estate Transfer Tax Return (“TP-584”).
In 2003, the New York State Budget Bill added Section 663 to the Tax Law requiring nonresident sellers to pay estimated personal income tax on the gain resulting from the sale of real property in New York State. The tax (currently 8.82% of the gain) is in addition to the transfer taxes to the City and State and is due at the time of closing by selling individuals, trusts and estates.
The TP-584 (State transfer tax form) requiresthese sellers to certify that they are residents of the New York State at the time of the Closing.
Those who cannot certify they are residents must complete forms (the IT-2663, for condominiums, homes and other real property or the IT-2664, for cooperatives) which detail the gain (or loss) resulting from the sale of the subject property and compute the estimated personal income tax due. The tax must be paid at the closing.
There are three exemptions to the requirement to pay estimated personal income tax to NYS under Tax law section 663 as follows:
1) If the “real property or cooperative unit being sold or transferred qualifies in total as the transferor’s/seller’s principal residence.” Meaning, a nonresident seller may be exempt from the payment of estimated tax if the property has been used as the taxpayer’s “principal residence.” The term “principal residence” has been understood to mean that the seller must have owned the property and lived in it as his or her main home for at least two years during the five year period ending on the date of the transfer;
2) If the seller is a mortgagor conveying mortgaged property to a mortgagee in foreclosure, or in lieu of foreclosure with no additional consideration; or
3) If either the seller or buyer is an agency or authority of the United States of America, the State of New York, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association, or a private mortgage insurance company.
The IT-2663 and IT-2664 forms are somewhat complicated as they contain line items for improvements, closing costs and depreciation and are typically completed by the seller’s accountant. As such, the appropriate IT form should be forwarded to the seller’s accountant well before closing to avoid a delay of the closing.