Both New Jersey and New York have found new sources of revenue by taxing entities that own real property.

The New Jersey Controlling Interest Transfer Tax (the “New Jersey Act”) levies a tax on the sale of a controlling interest in an entity where the consideration for the sale is in excess of $1,000,000 and where the entity owns a controlling interest in Class 4A commercial property.  The New Jersey Act also applies where the entity owns any interest in a combination of Class 4A commercial property and other real or personal property.  With certain exceptions, the tax, borne by the purchaser, is equivalent to 1 percent of the consideration paid for such transfer.

Similarly, New York’s Real Estate Transfer Tax Law (the “New York Act”) imposes a tax on the sale of a controlling interest in an entity that owns real property and an additional tax on an entity that owns residential real property.  The transfer tax on real property, which is a seller liability, is $2.00 for each $500 of consideration or fractional part thereof on the conveyance of real property when the consideration exceeds $500.  Should the seller fail to pay such tax, the purchaser and the seller are jointly and severally liable for such payment.  The additional tax on residential real property, which is a purchaser liability (unless such purchaser is exempt, in which event the tax is to be paid by the seller), is 1 percent of the consideration attributable to the real property for an entire conveyance equivalent to $1,000,000 or more.  Consideration is defined as the fair market value of the property transferred, apportioned based on the percentage of ownership interest transferred.

The New Jersey and New York Acts state that a controlling interest in a corporation exists if one owns 50 percent or more of the total combined voting power of all classes of its stock.  If the entity is a partnership or other organization, a controlling interest exists if one owns more than 50 percent of the Class 4A commercial property in New Jersey or more than 50 percent of the real property in New York.

Both states identify certain exemptions from the transfer tax.  The New Jersey Act states that certain purchasers, such as the federal and the New Jersey state governments and 501(c)(3) nonprofit corporations, are exempt from this tax, as are certain transfers that are incidental to a corporate merger or acquisition.  The New York Act has similar exemptions for conveyances to government entities, but also includes the following exemptions: (i) conveyances to change the identity or form of ownership or organization without a change in the beneficial ownership of the entity; (ii) conveyances to secure debt; (iii) conveyances in connection with a tax sale; and (iv) conveyances in connection with the Federal Bankruptcy Act.

Both states impose the tax on a series of related transactions.  The New Jersey Act applies to a transfer of a controlling interest in an entity effected through a series of related transactions occurring within six months of one another if the aggregate consideration for such series is in excess of $1,000,000.  The New York Act imposes the transfer tax if a subsequent transfer of an additional interest in the entity occurs within three years of the original transfer, or outside of the three-year time period if such transaction is viewed as an effort to avoid the transfer tax.

Those engaged in the sale of controlling interests of entities that own real property in either state should consult their tax and legal advisors regarding potential tax liability.