Transfer Tax Considerations For The Purchase And Sale Of New Jersey Real Property

Monday, October 20, 2014 - 11:52
Introduction

When selling or purchasing real property in New Jersey, one should be aware of certain transfer taxes and other local New Jersey tax issues that may arise in connection with the transaction. By being aware of these tax issues, the seller and purchaser will be able to draft the purchase and sale agreement or structure the deal so as to anticipate, and perhaps minimize or eliminate, certain taxes. These taxes, which are explained in greater detail below, include: the realty transfer fee, the buyer transfer fee (also known as the “Mansion Tax”), the controlling interest tax, bulk sales tax, and rollback taxes for the change in use of farmland-assessed real property.

Realty Transfer Fee

New Jersey’s Realty Transfer Fee Law, N.J.S.A. 46:15-7 et seq., imposes a realty transfer fee (“RTF”) on the recording of the deed for the sale of real property. The RTF, which is usually paid by the seller, is collected by the county upon the recording of the deed and applies to every conveyance of title to real property, subject to certain exceptions described below. 

The RTF is generally based on the consideration recited in the deed and is calculated in portions, with a particular fee rate assigned to each portion of the total consideration. Also, one set of rates is imposed for real property with a consideration of $350,000.00 or less and another set of (higher) rates is imposed for real property with a consideration of more than $350,000.00. For example, the RTF for the sale of real property with a consideration of $1 million would be $9,575, which is calculated as the sum of the following fees for each portion of consideration: (1) $2.90 for every $500 of consideration not in excess of $150,000 = $870; (2) $4.25 for every $500 of consideration in excess of $150,000 but not in excess of $200,000 = $425; (3) $4.80 for every $500 of consideration in excess of $200,000 but not in excess of $550,000 = $3,360; (4) $5.30 for every $500 of consideration in excess of $550,000 but not in excess of $850,000 = $3,180; (5) $5.80 for every $500 of consideration in excess of $850,000 but not in excess of $1,000,000 = $1,740; and (6) $6.05 for every $500 of consideration in excess of $1,000,000 = $0.

Instead of the full RTF, a partial RTF may be paid for the purchase and sale of a one- or two-family dwelling owned or occupied by a qualifying senior citizen aged 62 or older, a blind person, or a disabled person who is the seller; or for the purchase and sale of real property that is low and moderate income housing. The partial RTF is also calculated in portions, with certain rates applied to property with a consideration of $350,000.00 or less and other (higher) rates applied to property with a consideration of more than $350,000.00. Certain new construction is also subject to a partial exemption of the RTF.

Furthermore, certain real property transactions are fully exempt from the RTF Law and require no RTF upon the recording of the deed. As set forth in N.J.S.A. 46:15-10, these exempt transactions include, among many others: (1) transactions with a consideration of less than $100; (2) transactions by or to the United States of America, the State of New Jersey, or any instrumentality, agency, or subdivision thereof; (3) transactions by a receiver, trustee in bankruptcy or liquidation, or assignee for the benefit of creditors; and (4) transactions in specific performance of a final judgment.

Buyer Transfer Fee (The “Mansion Tax”)

As a supplemental fee to the RTF, the Buyer Transfer Fee Law, N.J.S.A. 46:15-7.2 et seq., imposes a fee, the Mansion Tax, on the recording of the deed for the sale of real property where the consideration paid is more than $1 million. The fee is one percent of the consideration recited in the deed and is paid by the purchaser.

The Mansion Tax applies to transactions involving only certain types of classified property. The sale of real property that is classified by the municipal tax assessor as “Class 4A Commercial,” “Class 2 Residential,” or “Class 3A Farm Property (Regular)” (but only if the property includes a building or structure intended/suited for residential use), or real property consisting of cooperative units, is subject to the Mansion Tax. Please note, however, that any real property, regardless of its classification, that is conveyed along with any of the above-classified property to the same grantee will also be subject to the Mansion Tax.  

Controlling Interest Tax

In an effort to prevent the circumvention of the Mansion Tax through the sale of an entity owning certain real property (as opposed to the outright sale of such real property), the New Jersey Legislature enacted the Controlling Interest Tax Law, N.J.S.A. 54:15C-1 (“CIT Law”). The CIT Law imposes a one percent fee (“CIT”) on the transfer of a controlling interest in an entity that owns certain real property. The CIT is only imposed if the real property is classified as “4A Commercial” and if the consideration or other valuation of the real property is greater than $1 million.

Where the entity owns only the Class 4A Commercial real property, and the consideration paid for the controlling interest in that entity is more than $1 million, the CIT is calculated as one percent of that consideration. In the alternative, if the entity owns the Class 4A Commercial real property and an interest in other property (real or personal), then the state of New Jersey looks to the equalized assessed value of the Class 4A Commercial real property. If the property’s equalized assessed value is greater than $1 million, then the CIT is calculated as one percent of that percentage of the equalized assessed value that is equal to the percentage of the ownership interest in the entity being transferred.

Please note that the CIT may be calculated based on one transaction or on a series of transactions. For example, a series of transactions that occur within six months of each other are generally considered as one transaction. In addition, a series of transactions involving different purchasers may be subject to the CIT if those purchasers are acting in concert (purchasers that are related parties are presumed to be acting in the concert).

Bulk Sales Tax

Although not imposing a tax per se on the sale of real property, the Bulk Sales Tax Law, N.J.S.A. 54:50-38 (the “Bulk Sales Law”) may impose certain tax liability on the purchaser of business assets, including real property, if proper procedures are not followed to allow the State of New Jersey Division of Taxation (“Division of Taxation”) to determine the seller’s tax liability (if any). Pursuant to the Bulk Sales Law, any purchaser of certain business assets must notify the State of New Jersey at least 10 business days prior to the closing date so that the Division of Taxation can determine if the seller has any outstanding tax liability with respect to the sale of the business assets. If the Division of Taxation determines that the seller has any such outstanding tax liability, then an escrow will be established to pay off the outstanding taxes from the closing proceeds.

To provide proper notice to the Division of Taxation under the Bulk Sales Law, the purchaser must complete and submit to the Division of Taxation a “C-9600 Form,” which requires valid tax identification numbers for both the purchaser and seller, the closing date, and valid mailing addresses for both the purchaser and the seller. The purchaser must also attach a copy of the executed purchase and sale agreement to the C-9600 Form.

The Division of Taxation must receive the C-9600 Form at least 10 business days prior to the closing date. The C-9600 Form cannot be hand-delivered, faxed or e-mailed; it must be delivered by certified mail, registered mail, overnight mail, FedEx or UPS.

If the purchaser fails to comply with the notice requirements of the Bulk Sales Law, then the purchaser may be held liable for any State of New Jersey tax liabilities associated with the business assets.

Rollback Taxes For Change In Use Of Farmland-Assessed Real Property

With respect to real property that is farmland assessed, a change in use to a non-farmland-assessed use will result in substantial real property tax increases, including two years of “rollback taxes.” Pursuant to the New Jersey Farmland Assessment Act of 1964, N.J.S.A. 54:4-23.1 et seq., real property that is used for certain agricultural purposes, i.e., real property that is “farmland assessed,” enjoys significantly reduced property taxes. However, if a change in use occurs and the property no longer meets the requirements for farmland assessment (e.g., the entire property is developed as a multi-family residential use), then the property becomes subject to “rollback taxes.” Real property taxes will be required to be paid – based on the increased assessment for the new use – for not only the year in which the change of use occurs, but also for the two years prior to the year in which the change of use occurs. Please note that the rollback tax requirement is not activated by the purchase of the real property, but instead by the change in use of the property. It is especially important for prospective purchasers of farmland-assessed real property who intend to develop the property after acquisition to be aware of this rollback tax requirement.

Conclusion

Although this article does not provide an exhaustive analysis of New Jersey transfer taxes and related tax issues, the author hopes that it will be helpful in ascertaining the types of taxes that need to be evaluated when structuring a deal for the sale of real property in New Jersey.

Peter M. Flannery is an attorney with Sills Cummis & Gross P.C.  He represents developers in connection with land use applications and redevelopment approvals and also provides advice regarding local zoning and development issues in connection with the purchase and sale of New Jersey real property. The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Sills Cummis & Gross P.C.

Please email the author at pflannery@sillscummis.com with questions about this article.