New New York State Tax Law Requires Pre-Closing Payments From Non-Residents

It is well-known that New York State has been facing a huge budget deficit.  In an effort to obtain better Income Tax collections from non-residents, the New York State legislature recently enacted the 2003-4 New York State Budget Bill, which added Section 663 to the Tax Law.  This new law requires non-resident taxpayers (individuals, estates and trusts) to pay estimated personal income tax on the gain, if any, resulting from the sale or transfer of real property in the state. This requirement does not apply to the sale or transfer of a principal residence, but for a non-New York State domiciliary, that is not much of a concession.  Also exempt is a conveyance by a foreclosure deed or a deed in lieu of foreclosure. It is effective as to sales and transfers of fee simple interests in real property on or after September 1, 2003.

The New York State Department of Taxation and Finance has advised that the new requirements will be applied only to the transfer of title by a deed and only when a non-resident individual, estate or trust holds record title. It will not apply when an entity such as a corporation, partnership or limited liability company is the transferor, even if a non-resident individual, estate or trust holds an interest in the entity. Transfers of leasehold estates, including leasehold condominiums, cooperative units or controlling interests are not subject to the new procedure.

No deed will be accepted for recording without compliance with the new procedures. A deed executed by an individual, estate or trust will be accepted for recording only when there is submitted to a recording office for each transferor either (a) a certification on Schedule D (“Certification of exemption from the payment of estimated personal income tax”) of a revised Form TP-584 (7/03) that the transferor is a resident of New York State or a non-resident exempt from the requirement to pay estimated tax, or (b) Part IV (“Certification for recording of deed”) of a new Form IT-2663, stamped by the New York State Department of Taxation and Finance, required when the transferor is a non-resident who has paid the estimated tax or when the transferor has certified that the transfer will not result in a gain for federal income tax purposes or the gain is not required to be recognized under the Internal Revenue Code or a United States Treaty.

So, what changes need to be made in the way a non-resident would sell real estate in New York on or after September 1, 2003?  For any non-resident individual, you should understand that before the deed you deliver at closing can be recorded, you must complete and file the new Form IT-2663 and pay the estimated income tax due on the gain you recognize on the sale.  For 2003, the rate used on the Form IT-2663 is 7.7% of the recognized gain.  If you own the real property with other individuals or entities which are exempt from these requirements, the income to be recognized can be allocated on the same basis as it would be allocated for the Federal Income Tax liability.  

If you are a fiduciary of a non-resident estate or trust, you also need to file the new Form IT-2663 and pay the estimated income tax before the closing of title.  For an estate, if you have not filed a Federal or state estate tax return for the state of the decedent’s domicile, you may have to get a date of death appraisal of the property to establish a stepped-up basis for the property.  You would have to get the appraisal to report the gain when the estate’s income tax return is due, but with this new law, the process is accelerated.  You will need this information prior to closing in order to deliver the deed for recording.  

For a non-resident trust, if the trust is revocable and the grantor is still living, the cost basis will be the grantor’s basis.  If the trust is irrevocable and the grantor is still living, the cost basis will depend on how the trust acquired title to the property.  If acquisition was by gift, you will need to establish the grantor’s basis.  If acquisition was by purchase, then the cost basis to the trust will be the income tax basis of the property.  

While title companies may expand their services to include the filing of the new Form IT-2663, those services are certainly not assured at this date and should not be expected.  So, if you are selling property in New York and you are not exempt from the pre-payment requirements, you might need the assistance of an attorney in New York to represent you in the sale and to obtain the necessary tax clearance.  If you find yourself in that position, please call our office to discuss the possibility of retaining our services to represent you in the sale.

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Copyright © 2007 STEPHEN C. SILVERBERG, PLLC  All rights reserved.
Last modified: December 27, 2007

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