New York assesses taxes on the sale or transfer of real property at varying levels depending on the nature and amount of the transaction.
By way of example, when the purchase price of "residential real property" (defined as premises that are or may be used as a personal residence, and includes one-, two-, or three-family homes, or an individual condominium or cooperative apartment unit) reaches a million dollars or more, a "mansion tax" of one percent (1%) of the transaction's total cost will be due and payable at closing.
Does this "mansion tax" apply to tiered transactions which involve construction activity? That was the question posed to the New York State Tax Appeals Tribunal (TAT) in the case of In re Kevin Kelly .
Mr. Kelly entered into a construction and purchase contract with J&B Builders, for a home to be built on two lots in a new subdivision in upstate New York. The agreement provided that Kelly would pay J&B Builders $1.7 million according to the following schedule: $10,000 upon contract, an additional $300,000 upon Kelly delivering a mortgage commitment, with the balance of $1,390,000 due at closing or passing of title.
When the builder was unable to fund the project, Kelly sought construction financing. Chase Manhattan Bank approved the loan, but required Kelly to own the land outright, unencumbered by the builder, so that the lender could perfect a first priority lien on the land. To that end, a deed to Kelly was executed prior to the construction's completion.
Because of the transaction's bifurcated nature, Kelly believed he was exempt from the "mansion tax" since $300,000 was attributable to the vacant land, while the remaining sum owed under the contract was allocable to nontaxable construction services. Of course, the Division of Taxation disagreed and assessed taxes in the amount of $17,000 plus interest (1% of $1.7 million).
On administrative appeal, the New York State Tax Appeals Tribunal (TAT) denied Kelly's petition. According to TAT, Kelly's deal comprised a single transaction, with a single purpose (the sale of land with a single-family home), with a single purchase price. (Apparently, no documentary evidence, or testimony, established to the contrary.)
Severing the transaction into steps for financing purposes did not change the arrangement's integrated nature.
Interestingly, TAT did not foreclose the notion that a contract for the sale of vacant land and a separate contract for construction services may be exempt from the "mansion tax." In an Advisory Opinion (TSB-A-96(14)R, October 24, 1996), the Division of Taxation suggested such distinct transactions were possible. In that particular instance, a purchaser entered into a contract to purchase vacant land from a developer for $550,000. At the same time, the parties entered into a separate contract for the construction of a house on the land for $1 million. Since the two agreements were separate and distinct (with no cross-default provisions), the "mansion tax" was inapplicable.
And that, is TAT.
To download a copy of TAT's decision, please use this link: In re Kevin Kelly
To visit TAT's website, please use this link: New York State Division of Tax Appeals and Tax Appeals Tribunal
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Our thanks to Marc Lawrence and our other friends at AMERICAN LAND SERVICES, INC., for flagging this decision.