NYS transfer tax affects real estate workouts. Owners of distressed real estate properties in New York State need to consider the implications of the Gains Tax imposed by the state on the transfer of real property. For such owners, the minimization of this Gains Tax is a primary consideration, particularly when the distressed property is subject to a workout or the loans taken out to finance them are subject to a restructuring. Factors that must be considered when planning how best to mimimize this tax include the availment of a mortagage enclosure, the use of a deed in place of a foreclosure, Chapter 11 bankruptcy and the transfer of equity resources to a debtor organization. Tax planning in each case must be geared toward the determination of how the Gains Tax should be allocated once a controlling interest in the property has been transferred.
Consideration includes the cancellation or discharge of an indebtedness or obligation.
Thus, the tax may be imposed using the mortgage balance as the consideration amount where the lien exceeds the property's fair market value. Therefore, by taxing indebtedness rather than market value, the Gains Tax may be imposed even though there is no economic profit. The consideration generally equals the foreclosure bid price plus any continuing liens on the property. If the lender is the successful bidder, the consideration will be the higher of the bid price or the amount of judgement in foreclosure as established by the referee. There is a risk New York would seek to include in consideration the full judgement that could have been obtained by the lender, rather than the reduced foreclosure judgment.