Our property has a title defect that makes it currently unsellable. We signed a contingent contract with one company to buy it IF we ever clear title within 15 years, at an escalating price, and simultaneously leased the property to a related company at fair rent for 5 years (with renewal options). The contingent purchase contract itself says it becomes null and void unless the state confirms this whole arrangement doesn't trigger the Real Property Transfer Gains Tax. Does it?

Plain-English summary

This tax no longer exists. New York's Real Property Transfer Gains Tax (former Article 31-B of the Tax Law) was a 10% tax on the GAIN from transferring New York real property where consideration was $1 million or more. It was repealed for any transfer occurring on or after June 15, 1996. This 1990 opinion is preserved here for historical and research value, not as current law.

Bonnie Heights Realty Corp. had owned a parcel at 1752 Shore Parkway in Brooklyn since March 1973, but the property carried a "cloud on title" rendering it unmarketable from the date of purchase onward -- and it wasn't clear the defect would ever be resolved, so legal title couldn't currently be transferred. In August 1986, Bonnie Heights entered a contingent purchase agreement with Temporary Transit Services, Inc. ("Transit"): Transit agreed to buy the property, but ONLY IF Bonnie Heights obtained clear title at any point during the following 15 years, with the purchase price escalating on a set schedule over that window. On the same day, Bonnie Heights also signed a separate five-year lease with Amboy Bus Co. ("Amboy") -- unrelated to Bonnie Heights but affiliated with Transit -- at fair rental value, with two additional five-year renewal options and CPI-indexed rent escalation. Notably, the parties built a safety valve into the contingent purchase agreement itself: it would become null and void unless the state Tax Commission first issued an advisory opinion confirming this whole arrangement -- the contingent purchase agreement plus the simultaneous Amboy lease -- did NOT trigger the gains tax.

The Department's analysis worked through the statute's expansive definitions: "interest" in real property specifically includes "an option or contract to purchase real property" (former § 1440.4), and "real property" itself broadly covers "every estate or right, legal or contingent" (former § 1440.6) -- language deliberately covering CONTINGENT rights like Bonnie Heights' unresolved title. On the substantive question, the Department extended its existing rule that a lease coupled with a purchase OPTION is always taxable regardless of the lease's own term (former 20 NYCRR § 590.5(b)) to cover a lease coupled with a binding purchase CONTRACT as well -- reasoning that an executed contract functions the same way an option does, except the buyer is legally BOUND to purchase (rather than merely privileged to) once any contingencies are satisfied. The Department also applied its "look-through" principle to treat Transit and Amboy -- related, affiliated companies -- as a SINGLE transferee for purposes of analyzing the combined transaction, since separate interests transferred to related parties are recognized as commonly held. Putting the pieces together, the simultaneous contingent purchase agreement and Amboy lease constituted a taxable transfer of an interest in real property. Because the contingent purchase agreement's own text made it void unless the Department's answer was FAVORABLE, this unfavorable opinion meant the contingent agreement itself would become null and void by its own terms.

What this means for you

Property owners with title defects structuring a future-contingent sale plus interim lease

Under this now-repealed tax, pairing a contingent purchase agreement (even one that might never actually close, depending on resolving a title cloud) with a simultaneous lease to a related company was treated the same as an ordinary lease-plus-purchase-option -- taxable regardless of the lease's own term, because the buyer's binding commitment to purchase (once contingencies clear) functioned like an option.

Real estate attorneys drafting a transaction conditioned on a favorable tax ruling

This opinion is a real-world example of a self-voiding contractual condition backfiring: when the requested advisory opinion came back unfavorable, the contingent purchase agreement's own terms nullified it -- worth remembering when building an advisory-opinion contingency into a deal.

Attorneys structuring deals involving affiliated buyer/lessee entities

The "look-through" treatment of Transit and Amboy as a single transferee, despite being formally unrelated to the seller and to EACH OTHER only through affiliation, shows how broadly the Department applied common-ownership analysis to combine related parties' interests in a single transaction.

Common questions

Q: Does this contingent-purchase-plus-lease rule still matter today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. Current New York real estate taxes have their own separate rules for contingent contracts and options.

Q: Why did a binding CONTRACT to purchase get treated the same as a mere OPTION?
A: Because the Department reasoned the practical effect is the same -- once any contingencies in the contract are satisfied, the buyer is LEGALLY BOUND to purchase, just as an option-holder would be free to exercise an option; the only real difference is that an option is discretionary while a contract obligates the buyer, which if anything makes the contract MORE significant, not less.

Q: What happened to the deal once the Department's opinion came back unfavorable?
A: Based on the contingent purchase agreement's own terms (requiring a favorable advisory opinion or becoming void), this unfavorable answer would have triggered the agreement's self-voiding provision -- though the underlying lease with Amboy, a separate document, wasn't described as similarly conditioned.

Q: Can another property owner with a title defect and a similar contingent sale rely on this exact ruling?
A: No, apart from the repeal -- an Advisory Opinion binds the Department only as to the petitioner and facts presented, and this result depended on the specific combination of a contingent purchase contract AND a simultaneous lease to an affiliated party.

Citations and references

Statutes and regulations:

• former Tax Law § 1440.4 ("interest" in real property broadly includes fee title, leasehold interests, beneficial interests, encumbrances, development-rights transfers, and any interest with rights to use/occupy or receive income from real property, INCLUDING an option or contract to purchase real property)
• former Tax Law § 1440.6 ("real property" means every estate or right, legal or CONTINGENT, in lands, tenements, or hereditaments located in whole or in part within the state)
• former Tax Law § 1440.7 (broad definition of "transfer of real property," including sale, exchange, assignment, and option; a leasehold or sublease is a transfer only if the three statutory conditions -- 49+ year term, substantial capital improvements, substantially all the premises -- are met)
• former 20 NYCRR § 590.5(b) (a leasehold coupled with the granting of a purchase option is taxable regardless of the lease's own term; the Department extends this to a leasehold coupled with a binding contract to purchase)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a90_1r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90 (1) R
Real Property
Transfer Gains Tax
January 24, 1990

STATE OF NEW YORK
COMMISSIONER 0F TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M891010A

On October 10, 1989, a Petition for Advisory Opinion was received on behalf of Bonnie
Heights Realty Corp., c/o Turecamo Coastal and Marine Towing, 1 Edgewater Plaza, Staten Island,
New York 10314.
The issue raised by Petitioner, Bonnie Heights Realty Corp., concerns the application of the
Real Property Transfer Gains Tax (hereinafter the "Gains Tax") to the execution of a contingent
purchase agreement between Petitioner and Temporary Transit Services, Inc. ("Transit") and the
simultaneous execution of a lease between the Petitioner and Amboy Bus Co., ("Amboy") a New
York corporation unrelated to the Petitioner but affiliated with Transit.
The facts presented are that on March 30, 1973, the Petitioner purchased a parcel of land in
the Borough of Brooklyn, Kings County, New York, located at 1752 Shore Parkway (the "property").
On the date of acquisition of the property by the Petitioner and at all times thereafter, the property
had a cloud on title rendering it unmarketable. At the present time, it is not clear whether the cloud
on title ever will be removed and, consequently, whether the property ever will be marketable. Thus,
legal title to the property cannot be transferred by the Petitioner.
On August 5, 1986, Petitioner entered into a contingent purchase agreement (the"agreement")
with Transit to purchase the property, but only if two prerequisites were satisfied. First, Transit
agreed to purchase the property if, at any time during the succeeding fifteen years, Petitioner
obtained clear title. The purchase price increases over the fifteen-year term of the agreement in
accordance with a schedule provided in the agreement. Second, Petitioner and Transit agreed that
the agreement would become null and void unless the New York State Tax Commission (now the
Commissioner of Taxation and Finance) issued an advisory opinion stating that the execution of the
agreement and the simultaneous execution of a lease between Petition and Amboy did not result in
the application of Chapter 60, Article 31-B of the New York Tax Law. The lease between the
Petitioner and Amboy also was executed on August 5, 1986, and provides that Amboy will rent the
property from the Petitioner for a term of five years at its fair rental value and that Amboy has the
option of renewing the lease for two successive five year terms at the base rent increased by a
formula tied to the Consumer Price Index.

TP-9 (9/88)

-2­
TSB-A-90 (1) R
Real Property
Transfer Gains Tax
January 24, 1990

Section 1440.4 of the Tax Law defines the term "interest", when used in connection with real
property, to include, but not limited to title in fee, leasehold interest, a beneficial interest, an
encumbrance, a transfer of development rights or anyother interest with the right to use or occupancy
of real property or the right to receive rents, profits or other income derived from real property.
Interest shall also include an option or contract to purchase real property. (emphasis added)
Moreover, section 1440.6 of the Tax Law defines the term "real property" to mean every
estate or right, legal or contingent, in lands, tenements or hereditaments, including buildings,
structures and other improvements thereon and leaseholds, which are located in whole or in part
within the state. (emphasis added)
Further, the term "transfer of real property" is defined, in pertinent part, to mean the transfer
or transfers of any interest in real property by any method, including but not limited to sale,
exchange, assignment ... option ... Transfer of an interest in real property shall include the creation
of a leasehold or sublease only where (i) the sum of the term of the lease or sublease and any options
for renewal exceeds forty-nine years (ii) substantial capital improvements are or may be made by or
for the benefit of the lessee or sublessee, and (iii) the lease or sublease is for substantially all of the
premises constituting the real property.
In addition, gains tax regulation 590.5(b) provides:
Q.

Is the creation of a leasehold for a term of less than 49 years ever
taxable?

A.

Yes. If a leasehold is coupled with the granting of an option to
purchase the property, the transfer is taxable regardless of the term of
the lease.

While such regulation only makes reference to a lease coupled with an option to purchase,
the granting of a contract to purchase coupled with a lease is to be treated in the same manner. This
is based on the fact that an executed contract to purchase contains the same elements as an option,
except that the right to purchase is not discretionary; the contract vendee is bound to purchase. This
is so even if the contract contains contingencies, since, if the contingencies are removed, the contract
vendee is bound to purchase.
Also, where separate interests in real property are transferred by one transferor to related
transferees, the mutuality of ownership in such transferees is recognized, and the related transferees
are treated as one transferee to the extent of the common ownership for purposes of acquiring the
interest in real property. This position is consistent with the "look through" principle which has been
applied throughout the administration of the gains tax.

-3­
TSB-A-90 (1) R
Real Property
Transfer Gains Tax
January 24, 1990

Accordingly, based on the foregoing, it is concluded that the execution of the agreement
between the Petitioner and Transit and the simultaneous execution of a lease between the Petitioner
and Amboy are deemed to be a transfer of an interest in real property and, thus, subject to the gains
tax.

DATED: January 24, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.