A trust is dividing a NYC condo interest and other assets equally among four beneficiaries. If one beneficiary receives the real property interest in place of their cash share, does that trigger New York's Real Estate Transfer Tax (RETT) -- and does it matter whether the property is worth more or less than that beneficiary's one-quarter share?

Plain-English summary

A settlor's trust held marketable securities, cash, and a 96% undivided interest in a New York City condominium apartment, all to be divided equally among her four adult children after her death. Because the exact dollar value of each child's one-quarter share couldn't be pinned down until estate taxes and expenses were finalized, the trustee proposed to distribute the condo interest entirely to one child (the "Beneficiary") in satisfaction of that child's one-quarter share, while the other three children would receive cash and/or marketable securities instead. The petitioner asked the Department whether either of two possible outcomes would trigger New York's Real Estate Transfer Tax (RETT).

Scenario 1 — the condo interest is worth less than or equal to the Beneficiary's one-quarter share. Any shortfall would be topped up with additional cash or securities to the Beneficiary; the Beneficiary pays nothing for the condo interest itself. The Department held this is NOT subject to RETT. Tax Law § 1401(e) defines a "conveyance" for RETT purposes to exclude a transfer made pursuant to a devise, bequest, or inheritance. Because the Beneficiary receives the property purely as an inheritance, with no consideration paid, the conveyance falls outside RETT entirely.

Scenario 2 — the condo interest is worth more than the Beneficiary's one-quarter share. Here the Beneficiary would pay the trustee cash equal to the excess value, in order to receive the full condo interest. The Department held this portion IS subject to RETT. RETT applies under Tax Law § 1402(a) to conveyances where consideration exceeds $500, and Tax Law § 1405(4) exempts only conveyances made without consideration and not in connection with a sale. By requiring the Beneficiary to pay cash for the excess value, the trustee is, in substance, selling that increment of the interest — so the transfer is no longer a pure inheritance for that portion, and the cash paid is taxable consideration. The tax is measured only by the cash the Beneficiary actually transfers, not by the full value of the condo interest.

What this means for you

Pure in-kind inheritance distributions are RETT-free, even of real property

If a trust or estate distributes real property to a beneficiary strictly in satisfaction of that beneficiary's inheritance share, with no cash or other consideration flowing from the beneficiary, RETT does not apply — the devise/bequest/inheritance exclusion in Tax Law § 1401(e) covers it regardless of the property's value.

The moment a beneficiary pays cash for "extra" value, that slice becomes a taxable sale

If a beneficiary receiving real property from a trust or estate has to pay cash to make up the difference between the property's value and their inheritance share, that cash payment is treated as consideration for a sale of the excess value — triggering RETT on that cash amount, even though the same transaction would have been tax-free if the property happened to be worth less than or exactly equal to the share.

Structuring an unequal in-kind trust distribution can avoid or minimize RETT

Because the tax outcome turns on whether any cash changes hands from the beneficiary to the trustee, executors and trustees dividing an estate that includes real property among multiple heirs can influence RETT exposure by how the in-kind versus cash allocations are structured relative to each heir's share.

Common questions

Q: If a trust simply gives an heir real property as their inheritance share, is that a taxable "sale" for RETT purposes?
A: No. Tax Law § 1401(e) excludes conveyances made pursuant to a devise, bequest, or inheritance from the definition of a taxable "conveyance," so a pure in-kind inheritance distribution is not subject to RETT.

Q: What if the real property distributed to one heir is worth more than that heir's fair share, and they pay the trust cash to cover the difference?
A: That cash payment is taxable. Requiring the heir to pay for the excess value converts that portion of the distribution into, in substance, a sale for consideration under Tax Law § 1402(a), and RETT is measured on the cash paid.

Q: Does it matter if the real property distributed is worth less than the heir's share, with cash making up the rest?
A: No RETT applies in that direction — Tax Law § 1405(4) exempts conveyances made without consideration and not in connection with a sale, and here the heir pays nothing for the real property itself; the shortfall is simply covered with other trust assets.

Citations and references

Statutes and guidance:

• Tax Law § 1402(a)
• Tax Law § 1401(e)
• Tax Law § 1405(4)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a17_1r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel

TSB-A-17(1)R
Real Estate Transfer Tax
August 1, 2017

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION PETITION NO. M160916A
The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTED REDACTED REDACTED REDACTED REDACTE. Petitioner asks whether the
conveyance described below will be subject to the New York State Real Estate Transfer Tax
(the “RETT”).
We conclude that, if the interest in real property that is held in the Trust is distributed to
a beneficiary pursuant to the terms of the Trust Agreement after the death of the settler of the
trust, and no consideration is paid by the beneficiary for the conveyance, the RETT will not be
due on the transfer. To the extent that the beneficiary is paying cash to the Trustee for the
transfer of the real property, the RETT will be due.
Facts
The Settlor established the Trust for her own lifetime benefit and for the subsequent
benefit of her descendants. The Trust Agreement provides that, upon the Settlor’s death and
after the distribution of the Settlor’s tangible personal property and certain cash amounts as
provided therein, the remaining property (the “Trust Balance”) shall be paid to the Settlor’s
issue. The Settlor was survived by her four children, each of whom was over the age of thirtyfive at the time of the Settlor’s death.
The Trust Balance consisted of (i) marketable securities, (ii) cash, and (iii) a 96%
undivided interest in a condominium apartment located in New York City (the “Interest”). The
Trust Agreement provided the Trustee with “discretionary powers without limitation” to make,
without the consent of any beneficiary, any payment, distribution or division required by the
Trust Agreement, either in cash or in kind, or partly in cash and partly in kind, in proportions
like to or different from that paid or transferred to anyone else. Pursuant to that authority, the
Trustee proposes to distribute the Trust Balance in amounts equal to one-quarter of the Trust
Balance to each child. To facilitate the division, the Trustee plans to distribute the Interest to
one of the Settlor’s children (the “Beneficiary”), in satisfaction of the Beneficiary’s right to
receive a one-quarter portion of the Trust Balance. However, because finalization of the
amount of estate taxes and other expenses payable has not yet been completed, the value of the
Trust Balance cannot be conclusively determined at this time. Accordingly, the Petitioner
submits two scenarios under which each of the Settlor’s three other children would each receive
cash and/or marketable securities having an aggregate value equal to a one-quarter share of the
Trust Balance, and that each child other than the Beneficiary would receive no portion of the

-2-

TSB-A-17(1)R
Real Estate Transfer Tax
August 1, 2017

Interest. For purposes of this Advisory Opinion, it is assumed that the fair market value is equal
to $1,000,000.
Scenario 1. This scenario assumes that the fair market value of the Interest to be
distributed is less than or equal to the one-quarter portion of the Trust Balance to which the
Beneficiary is entitled. To the extent that the value of one-quarter of the Trust Balance exceeds
the fair market value of the Interest, the balance of such one-quarter Trust Balance would be
satisfied by an additional distribution of cash and/or marketable securities to the Beneficiary to
make up the difference. For example, if the value of one-quarter of the Trust Balance is
$1,000,000, the Beneficiary would receive only the Interest. If the value of one-quarter of the
Trust Balance is $1,100,000, the Beneficiary would receive the Interest, plus cash and/or
marketable securities with an aggregate value of $100,000.
Scenario 2. This scenario assumes that the fair market value of the Interest to be
distributed exceeds the one-quarter portion of the Trust Balance to which the Beneficiary is
entitled. In connection with distribution of the Interest, the Beneficiary would transfer to the
Trustee cash in an amount equal to the excess of (a) the fair market value of the Interest over (b)
the value of one-quarter of the Trust Balance. For example, if the value of one-quarter of the
Trust Balance is $900,000, the Trustee would distribute the Interest to the Beneficiary, and the
Beneficiary would transfer $100,000 in cash to the Trustee.
Under both of the above scenarios, the Trustee would distribute to each of the three
other children of the Settlor cash and/or marketable securities having an aggregate value equal
to a one-quarter share of the Trust Balance and each child other than the Beneficiary would
receive no portion of the Interest.
Analysis
RETT is imposed by Tax Law § 1402(a) generally on each conveyance of real property
or interest therein when the consideration exceeds $500. The tax is equal to $2 for each $500 of
consideration.
With regard to Scenario 1: Tax Law § 1401(e) expressly provides that for purposes of
the RETT, the conveyance of real property does not include a conveyance pursuant to devise,
bequest or inheritance. Conveyance of the Interest to the Beneficiary is a conveyance pursuant
to an inheritance, and as such, it is not subject to the RETT.
With regard to Scenario 2: Tax Law § 1401(e) defines “conveyance” in part as the
transfer of any interest in real property by any method. Tax Law § 1405(4) provides that the
RETT shall not apply to conveyances of real property without consideration and otherwise than
in connection with a sale. By requiring the beneficiary to transfer cash equal to the excess of
the fair market value of the Interest over the value of one-quarter of the Trust balance, the
Trustee is in essence selling the Interest to the Beneficiary and the amount of cash paid by the
Beneficiary to the Trustee in exchange for the distribution of the Interest is the consideration for

-3-

TSB-A-17(1)R
Real Estate Transfer Tax
August 1, 2017

the sale of the Interest. As such, the transfer of the Interest to the Beneficiary under Scenario 2,
is subject to the RETT. The tax is measured by the amount of cash transferred by the
Beneficiary to the Trustee.

DATED: July 31, 2017

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

NOTE:

An Advisory Opinion is issued at the request of a person or entity. It is limited to
the facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.