The New York State Department of Taxation and Finance has issued an Advisory Opinion ruling that the conveyance of two master condominium units to the members of a limited liability company (“LLC”) were exempt from real estate transfer tax (“RETT”) because the conveyance was a “mere change of identity or form” in which the beneficial ownership of the property did not change. Advisory Opinion, TSB-A-15(2)R (N.Y.S. Dep’t of Taxation & Fin., May 12, 2015).
The LLC acquired real property in New York City with the purpose of constructing a 40-story building and converting it into a condominium containing two “master units” upon substantial completion of the building. RETT was paid at the time the LLC acquired the property. The two members of the LLC contemplated that one master unit would consist of floors 23-40 on which for-sale condominiums would be built, and the other master unit would consist of floors 2-22, which would contain residential apartments for rent.
Under the LLC’s operating agreement, the initial membership interests in the petitioner were allocated 63% and 37%, respectively, for the shared development costs, but each member was obligated to pay for 100% of the costs incurred for work done solely for the benefit of that member. Income, losses, deductions, appreciation, depreciation, and related expenditures attributable to each unit were allocated to the respective member. Losses and profits not related solely to a master unit were allocated to the members in accordance with their membership interests. On substantial completion of the building, the LLC would be liquidated, and the title to the master units would be conveyed to the respective members, with each member taking title to 100% of its master unit. The question presented was whether the conveyance to the members was exempt from the RETT.
Tax Law § 1402(a) imposes RETT on each conveyance of real property or interest therein located in the State. However, conveyances that “effectuate a mere change of identity or form of ownership or organization where there is no change in beneficial ownership” are exempt from the RETT. Tax Law § 1405(b)(6).
The Department ruled that the conversion of the building to a condominium and the resulting conveyance of title to the master units from the LLC to the two members would constitute a mere change of identity or form of ownership as long as each member’s ownership percentage in the condominium after the conveyances was the same as each member’s respective ownership allocation in the LLC’s operating agreement before the conveyances. In so ruling, the Department cited to other Advisory Opinions in which it had similarly ruled that a conversion of a building into condominium units and the subsequent conveyance of title to those units from an LLC to its respective members was exempt from RETT because the conveyances constituted a “mere change of identity or form.”
In this instance, the Department ruled that conveyances of real property were exempt as mere changes of identity or form because there would be no change in “beneficial ownership” before and after the conveyance if the members’ ownership percentage in the condominium was the same as the members’ ownership allocation in the LLC. Although the term “beneficial ownership” is not defined in the statute, the Advisory Opinion confirms the general rule that in determining whether the beneficial ownership has changed, one looks to whether a taxpayer’s percentage interest in the property has changed. This bright-line approach is supported by the regulations relating to the “mere change of identity or form” exemption (20 NYCRR § 575.10) and provides a practical and straightforward way to determine whether a transaction qualifies for the exemption.