In New York State's proposed Fiscal Year 2018 budget, Governor Andrew Cuomo has added an amendment to New York State real estate transfer tax (the Transfer Tax) law affecting partnerships, LLCs, S-Corps, and non-publicly traded C-Corps with fewer than 100 shareholders. The proposed law will impose the Transfer Tax on the conveyance of any interest (whether controlling or non-controlling) in an entity, 50% or more of the fair market value of which is attributable to real property located in New York State.1
As background, New York State imposes the Transfer Tax on each conveyance of real property located in the State for consideration in excess of $500. The tax is imposed at the rate of $2 for each $500 of consideration. The tax is paid by the grantor; however, if the grantor does not pay the tax (or is exempt from the payment of the tax), the grantee must pay the tax. To prevent an owner from avoiding the Transfer Tax by transferring to the grantee ownership interests in a legal entity that owns New York State real estate (as opposed to the real estate itself), the current law similarly imposes the Transfer Tax on transfers of "controlling interests" in entities that own New York real estate. A "controlling interest" generally means 50% or more of voting stock (in the case of a corporation) or of capital, profits, or beneficial interests (in the case of partnerships, LLCs, and trusts) in an entity that owns any New York real estate during any rolling 3-year period. Thus, the Transfer Tax generally does not apply to transfers of minority interests in entities owning New York real estate which, in the aggregate, do not exceed the 50% threshold during any rolling 3-year period.
The proposal seeks to expand the Transfer Tax by applying it to the transfer of minority interests in entities that own New York real property if the entity's assets consist primarily of New York real property, as explained below. The budget proposal accomplishes the change in the law by amending the definition of "conveyance."2 The proposed definition of a conveyance will also include the transfers of "an interest in a partnership, limited liability corporation, S corporation or non-publicly traded C corporation with fewer than one hundred shareholders that owns an interest in real property that is located in New York and has a fair market value that equals or exceeds fifty percent of all the assets of the entity on the date of the transfer of an interest in the entity."3
There are two additional considerations that are also important to discuss with respect to this rule. First, when calculating the ratio of real property to an entity's other assets, only assets that the entity owned for at least two years before the date of the transfer are considered.4 Therefore, theoretically, a party cannot quickly transfer non-real property assets into the entity in order to dilute the ratio that its real property represents and thereby avoid the Transfer Tax. Second, the taxable consideration for these transactions will be based on the fair market value of the New York real property multiplied by the percentage of the entity transferred.5
With this new proposal, the Transfer Tax would have broader application to indirect transfers when compared to other jurisdictions that similarly impose transfer tax on indirect transfers of real estate.6 In addition, it remains to be seen whether New York City will follow suit and add a similar provision to its own Real Property Transfer Tax, as the City tends to conform its tax law to that of the State.
Thus, it may be prudent for any investor operating or investing in a real estate fund or joint venture investing in New York real estate to review the transactional costs of any proposed transfers and redemptions of interests in such fund or JV, as well as requisite documentation, in a manner similar to that of a customary FIRPTA review of such transfers and redemptions.
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This article was prepared for marketing purposes and does not constitute tax opinion or advice to any taxpayer. Each taxpayer should consult its own tax advisor for the application of the tax laws to its own facts. In addition, this article is based on current law, and the authors will not update any reader on any future changes, including those with retroactive effect, in tax law.
 See New York State, FY 2018 Executive Budget Briefing Book (2017), https://www.budget.ny.gov/pubs/executive/eBudget1718/fy1718littlebook/BriefingBook.pdf.
 N.Y. Tax Law § 1401(d), (e) (as proposed).
 N.Y. Tax Law § 1401(e) (as proposed).
 N.Y. Tax Law § 1401(d) (as proposed).
 For example, in Maryland, real property transfer tax is triggered with the transfer of a controlling interest, with "controlling interest" generally defined as a direct or beneficial ownership interest of more than 80% of the entity. MD Code Ann., Tax – Property, §§12-117, 13-103 (West 2016). Moreover, in the District of Columbia, a controlling interest is generally defined as more than 50% of the interests in the entity owning real property in the District, but such tax only applies if either (i) the entity derives more than 50% of its gross receipts from the ownership of real property, or (ii) the entity holds real property in D.C. with a value greater than or equal to 80% of its total holdings. D.C. Code Ann. §§42-1102.02; 42-1103(a)(2) (West 2017).