Real property transactions in New Jersey can trigger several tax consequences that must be addressed at the time of closing.
In New Jersey, real estate deals are subject to a variety of unique requirements that can sometimes delay or financially burden a transaction to the unsuspecting seller or purchaser. This article is the first in a series that will cover the laws most frequently triggered by New Jersey real property transactions. This article focuses on certain transfer tax liabilities.
There are three main taxes payable upon the sale of property in New Jersey: the realty transfer fee, the so-called “mansion tax” and capital gains taxes.
Realty Transfer Fee.1 The realty transfer fee is a graduated tax of between 1 percent and 1.5 percent of the consideration paid for the real property being purchased. The consideration can include anything of value given for the property, including assumption of the remaining balance on a mortgage. By statute, the realty transfer fee is payable by the seller at the time of the deed recording; however, parties may agree by contract to shift the burden from sellers to purchasers. There are exemptions from the realty transfer fee for certain situations, including where consideration is less than $100, a transfer to a governmental entity, and conveyances among commonly owned entities. Partial exemptions exist for seniors and the disabled.
Mansion Tax.2 The New Jersey mansion tax is a 1 percent tax imposed on the transfer of certain types of real estate where the consideration paid is more than $1 million. The mansion tax is applicable to properties classified as “Class 2” residential, which includes single family homes, and “Class 4A Commercial,” which encompasses offices and most commercial establishments. The tax is not payable on vacant land, industrial sites or multifamily apartment buildings. By statute, the fee is payable to the county clerk by the purchaser at the time of the recording of the deed, but, as with the realty transfer fee, the contracting parties may agree to shift the responsibility. Any transfers exempt from the realty transfer fee will be exempt from payment of the mansion tax. Nonprofit corporations are also exempt from payment of the mansion tax.3
Capital Gains and Other Taxes. New Jersey has two statutes designed to collect outstanding capital gains and other taxes payable by sellers at closing on the sale of real property. These laws do not affect the amount of taxes due, only the manner in which they are payable.
Non-resident payments.4 All sellers of real property in New Jersey must record either a Seller’s Residency Certification (GIT-REP-3) or a Seller’s Non-Residency Certification (GIT-REP-3) with the deed. Non-resident individuals, estates and trusts completing the Non-Residency Certification are required to make an estimated payment of taxes on capital gains earned on the sale of property, but, in no case, can this amount be less than 2 percent of the purchase price payable at closing. Resident sellers, corporations and limited liability companies do not have to make an estimated payment at closing. The law does not alter the amount of any tax liability. It simply requires that the payment be made at the time of closing. Sellers then will subsequently file their requisite annual tax return with the state to determine the correct amount of the tax, seek any eligible refund for overpayments, or make additional tax payments.
The Bulk Sales Act.5 Similarly, the Bulk Sales Act is not an additional tax, but rather is designed to permit the state to collect capital gains tax and all other outstanding taxes that a seller may owe the state upon the sale of business assets, including real property, while a source of funds is available (i.e., the sale proceeds). Although the taxes are payable by the seller, purchasers must comply with the notice requirements of the law or else be held liable for any state taxes associated with the transferred assets.
To comply with the Bulk Sales Act, purchasers of business assets must submit a Notification of Sale, Transfer, or Assignment in Bulk, known as Form C-9600 (C-9600 Notice) to the New Jersey Department of Treasury, State Division of Taxation, Bulk Sales Section (Division), at least ten 10 days prior to closing. The Division will then review the seller’s state tax liabilities from top to bottom, including any amounts that might be owed to the state from wage taxes to capital gains on the sale. Once the review is complete, the Division will demand that the buyer establish an escrow from the closing proceeds in an amount sufficient to cover the outstanding liabilities of the seller. If the seller is otherwise current on its state tax obligations, the escrow amount will generally equal the maximum capital gain tax percentage applied to the purchase price stated in the contract. Sellers who are New Jersey employers will also be expected to pay their payroll taxes current through the closing date.
Sellers can reduce the amount of the escrow required by the Bulk Sales Act by filing an Asset Transfer Tax Declaration (TTD) with the Division prior to closing. This document allows the seller to provide an accounting of its investment in the property for tax purposes (i.e., the amount the seller paid when buying the property and other expenses involved in the sale) so that the taxable gain on the sale can be accurately determined by the state. This, in turn, may reduce or eliminate the bulk sale escrow requirement altogether, and the calculated amount of taxes can be paid directly to the Division at closing. The completed TTD form should be reviewed by the seller’s accountant to ensure accuracy before submission to the state.
After closing, or in response to the seller’s submission of the TTD form, the Division will issue a demand letter for payment of the seller’s outstanding taxes from the escrowed funds. Once that amount is paid, the buyer will receive a tax clearance certificate, and the remaining funds in escrow, if any, may be released to the seller.
If the purchaser fails to file the C-9600 Notice with the Division or, having received an escrow notice from the state, fails to establish the required escrow, the purchaser will be held liable for any state taxes outstanding against the seller as of the date of sale. The state has the power to levy a judgment for such taxes against the purchaser in the same manner as it could against the seller, including placing a lien against all properties in New Jersey owned by the purchaser. Failure to timely and accurately file the C-9600 Notice with the Division prior to closing is not curable. Liens against property arising in this manner are not insured by title insurance policies since they arise after the closing date.
The Bulk Sales Act requirements do not apply to residential transactions by individual owners or to transactions in the ordinary course of business. For example, the selling of homes by a residential developer would not trigger compliance with the law.
The parties in a transaction should pay careful attention to the minimum 10- day turnaround of the Division prior to closing. While we have worked with officials in the Division who are able to issue escrow letters in less than 10 days, there are no guarantees, especially during the busy transaction season. As a result, the Bulk Sales Act process can make “sign and close” deals difficult and risky to accomplish in New Jersey, even though draft agreements may be submitted to the Division and the tax calculated in accordance with the draft.
As the above indicates, real property transactions in New Jersey can trigger several tax consequences that must be addressed at the time of closing. Accordingly, sellers and purchasers must be prepared to consider New Jersey’s unique tax liability pitfalls when negotiating and consummating real estate deals.