By Vincent J. Gallo, Esq., Chair, RCBA Real Property Committee
August 10, 2013
I have recently received a significant number of inquiries from colleagues as to the appropriate transfer tax rate that the City of New York should apply for purposes of calculating the New York City Real Property Transfer Tax for a particular transfer of real property within the City of New York, based upon its Department of Buildings classification that may differ from its Tax classification by the Department of Finance. The issue raised, which applies universally, is, where a property is, at the time of transfer, classified as a three-family dwelling by the New York City Department of Buildings as corroborated by a Final Certificate of Occupancy to this effect, and would be taxed at a rate of 1.425% under RPTT §11- 2102(a)(9)(i), how does this square with the same premises being classified by the New York City Department of Finance, for assessment and tax purposes, as a four-family, which would be taxed at a rate of 2.625% of the selling price pursuant to RPTT §11-2102(a)(9)(ii).
Interestingly, a case on point is the Matter of the Petition of Mohammed F. Fokhar, TAT(H) 08-14 (2010). While the matter was a decision handed down by the New York City Tax Appeals Tribunal, Administrative Law Judge Division, it is directly on point, and clearly sheds light on the position taken by the City of New York for purposes of assessing and collecting New York City Real Property Transfer Taxes, and the Bar should be well cognizant of their position.
In the Fokhar case, a property contained a 1988 Final Certificate of Occupancy for a three-family dwelling. The City of New York Department of Finance had, in 1999, on the Tax Assessment Roll, reclassified the premises as a four family, in contra-distinction thereof. This re-classification from a three-family to a four-family by the Department of Finance was not challenged at that time in 1999 by the then Owner. A sale took place in 2005, and the City endeavoured to collect the said New York City Real Property Transfer Tax at the higher rate of 2.625% based on the Tax Classification as a four-family, thereby ignoring the Department of Buildings classification as a three-family.
The Tribunal ruled that although the Certificate of Occupancy indicated that the property was constructed as a three-family dwelling, the tax due on the transfer is not determined by that classification. In so ruling, the Tribunal referred to a Ruling Request at FLR #034805-021, June 25, 2003, which states that: “[I]n the absence of information suggesting the Department’s real property tax classification is incorrect, that classification, and not the Certificate of Occupancy is controlling for RPTT purposes.” See http://www.nyc.gov/html/dof/downloads/pdf/02pdf/034805r.pdf.
Accordingly, the Grantor was taxed at the higher rate of 2.625% of the selling price, as opposed to the lower rate of 1.425%, which was a remarkable difference.
Interestingly, the New York City Department of Buildings, Building Information System website at http://a810-bisweb.nyc.gov/bisweb/bispi00.jsp contains the following caveat:
Please Note: The Department of Finance's building classification information shows a building's tax status, which may not be the same as the legal use of the structure. To determine the legal use (emphasis added) of a structure, research the records of the Department of Buildings.
So in one respect, the Department of Finance takes the position that it is empowered to collect the higher transfer tax in relying on the tax classification of a premises, and may effectively ignore the legal classification of a premises by the Department of Buildings. In direct contrast, the Department of Buildings, on its website, issued a stern warning to the general public that the legal use is determined exclusively by the Department of Buildings classification.
So the City can seemingly collect tax at the higher rate while at the same time close their eyes as to the seemingly in-appropriate use and tax classification.
Therefore, until these two (2) City agencies endeavour to concur, and speak with one voice, practitioners should be readily cognizant that their Seller/Clients risk incurring an un-expected higher transfer tax on the sale of real property in the City of New York.