Our partnership sponsor holds 26 unsold condominium units and wants to liquidate, distributing the units to its eight partners in proportion to their ownership percentages. Because unit values don't divide evenly (especially for four partners with just 1.5% interests each), we may need side payments of cash or property to equalize the distributions, or have small partners take fractional tenant-in-common interests. Does any of this trigger New York's Real Property Transfer Gains Tax, and how would later individual sales by the partners be aggregated?

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 It was repealed for any transfer occurring on or after June 15, 1996.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 1993 opinion is preserved here for historical and research value, not as current law.

110 East 87 Co., a New York limited partnership, had converted its Manhattan apartment building to condominium ownership starting in 1984 (65 residential and 3 professional units, over $10 million in original offering value). By 1992, the partnership still held 26 unsold units, worth roughly $1.1 million total, split among eight partners with very different ownership percentages -- from four individual partners at 1.5% each up to a corporate partner at 42.5%. The partnership planned to liquidate and distribute the unsold units to its partners in proportion to their ownership interests, but the math didn't divide evenly: each unit was worth $40,000-$60,000, while the smallest partners' pro rata share of the whole pool was only about $16,500. The partnership considered several structures to solve this mismatch: giving the smallest ("low ownership") partners cash or other property instead of a fractional unit; equalizing everyone's distributions with side contributions or payouts before distributing the units; or giving the low-ownership partners a shared tenant-in-common interest in units alongside cash equalization.

The Department addressed all six numbered questions the partnership raised, but the throughline was the same: a realty transferor's distribution of property to its own owners, in proportion to their EXISTING ownership interests in the entity, doesn't require payment of gains tax (former 20 NYCRR § 590.35(f), which the Department applied to condominium units the same way it applies to cooperative shares). Every structure the partnership proposed -- straight pro rata distribution, cash/property equalization for low partners, liquidation payouts to low partners first, or fractional tenant-in-common interests -- qualified for this tax-free treatment, AS LONG AS any cash or property used to equalize value was paid or contributed BEFORE the condominium units themselves were distributed. If a partner's units were distributed first and the equalizing cash/property came afterward, the ordering wouldn't fit the exemption's premise. The Department also flagged an important side risk: if the cash/property equalization payments (used to bump up or buy out the low-ownership partners' interests) themselves worked out to shift any partner's percentage across the 50%-or-more "controlling interest" line, that shift could independently trigger the gains tax, separate from the otherwise-exempt unit distribution. On original purchase price, when units pass tax-free under this rule, each partner simply steps into the partnership's own original purchase price for those units -- unless an equalizing transaction did trigger a controlling-interest acquisition, in which case that partner's purchase price could get a step-up. Finally, the Department confirmed that all future sales of these units by the partners must be aggregated with each other AND with the partnership's own prior condominium sales for purposes of the $1 million exemption threshold, since the units were being held for investment or resale.

What this means for you

Real estate partnerships liquidating and distributing unsold inventory to partners

Under this now-repealed tax, distributing unsold condominium (or cooperative) units to partners in proportion to their existing ownership interests was a well-established tax-free path, even when the units didn't divide evenly and needed cash or property side payments to balance things out -- but the SEQUENCE mattered: equalize first, distribute units second.

Sponsors and their attorneys structuring wind-downs of condo/co-op offering plans

This opinion is a rare example of the Department blessing several ALTERNATIVE structures for the same underlying transaction in one opinion, useful as a menu of options (straight pro rata, cash equalization, liquidation-first, tenant-in-common) for solving the "units don't divide evenly among partners" problem.

Accountants tracking original purchase price and aggregation after a tax-free unit distribution

If you're reconstructing a partner's tax basis and aggregation history for units received tax-free from a partnership under this rule, this opinion confirms the partner inherits the partnership's original purchase price and that all subsequent sales (by the partnership and by all partners who received units this way) are aggregated together for the $1 million threshold.

Common questions

Q: Does this pro rata distribution exemption 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 partnership distributions of property.

Q: Why did the ORDER of the equalization payments and unit distribution matter?
A: The underlying regulation exempts a distribution that's genuinely proportionate to each owner's EXISTING interest. If the cash/property equalization happens first, the subsequent unit distribution can be measured against each partner's now-adjusted (but still pre-existing, as of that moment) ownership percentage -- preserving the "proportionate to existing interest" fit the exemption requires.

Q: Could equalizing payments to the low-ownership partners themselves cause a tax problem?
A: Yes -- if those payments (used to buy out or supplement a low partner's interest) resulted in another partner or group acquiring 50% or more of the partnership's capital, profits, or beneficial interest, that acquisition of a "controlling interest" could independently trigger the gains tax, regardless of how the unit distribution itself was treated.

Q: Can another partnership winding down a condo or co-op plan 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 110 East 87 Co.'s specific ownership percentages, unit values, and proposed transaction sequencing.

Citations and references

Statutes and regulations:

• former Tax Law § 1440.7 (definition of "transfer of real property," including conveyance upon liquidation, and the general aggregation-of-partial-transfers rule)
• former 20 NYCRR § 590.35(f) (a realty transferor's transfer of shares/units to its owners, for investment or resale, in proportion to their existing ownership interests, does not require payment of gains tax, so long as the owners don't take them as tenant stockholders; owners who receive units this way inherit the transferor's original purchase price)
• former 20 NYCRR § 590.40(a) (for cooperative-plan transfers, all transfers by the realty transferor AND by owners who received their interests tax-free are aggregated together to test the $1 million exemption)
• former 20 NYCRR § 590.44(a) (defines "acquisition of a controlling interest": 50% or more of voting stock for a corporation, or 50% or more of capital/profits/beneficial interest for a partnership or other entity; the ACT of the transferee acquiring the interest is what triggers the tax)
• former 20 NYCRR § 590.45(d) (interests acquired by the same person within three years of each other are added together in determining whether a controlling interest was acquired)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a93_5r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (5)R
Real Property
Transfer Gains Tax
March 19, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M921029E

On October 29, 1992, a Petition for Advisory Opinion was received from 110 East 87 Co.,
One Penn Plaza, Suite 3515, New York, New York 10119.
The issues raised by Petitioner, 110 East 87 Co., are as follows:
1)

Whether the transfer of unsold condominium units by the realty transferor, a
partnership, to the respective partners, for resale, in proportion to their respective
ownership interests in the entity will require the payment of the Real Property
Transfer Gains Tax.

2)

Whether the distributions from or contributions to the realty transferor of cash or
other property from or to the partners solely to equalize the distributions of
condominium units to the respective partners in proportion to their ownership
interests will comply with the requirement of a distribution in proportion to the
respective ownership in the entity and thus would not require the payment of gains
tax. Due to the low partnership interest of certain partners, such partners may receive
cash and other property only in lieu of realty, in proportion to their ownership
interests.

3)

Alternatively, whether the distributions from the realty transferor of unsold
condominium units to the partners and distributions of cash or other property to
equalize the value of such distributions, including the distribution of cash or other
property only to certain "low" ownership partners, all in proportion to ownership
interests, will be considered a transaction which will require the payment of gains
tax.

4)

As a second alternative, whether the distributions of unsold condominium units by
the realty transferor to the respective partners in proportion to their respective
ownership interests, including a contribution to or distribution of cash or other
property to equalize value, and a distribution of realty as tenants-in-common to
certain of the low ownership partners, will require the payment of gains tax.

5)

That following the transfer of condominium units to the respective partners, what
will the total original purchase price be to each of the respective partners, for
purposes of the gains tax, after the transfer of condominium units from the realty
transferor in the proposed transaction considering each of the alternatives and the
extent, if any, that each such proposed transfer from the realty transferor did or did
not require the payment of gains tax.

6)

Whether regarding subsequent transfers of condominium units by the respective
partners, what would be the proper application of the aggregation rules, for purposes
of the $1 million exemption, for realty received from the realty transferor in the

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Transfer Gains Tax
March 19, 1993
proposed transfer and each of the alternatives, considering the extent, if any, that
such units were received in a transaction which did or did not require the payment
of gains tax.
Petitioner, a New York Limited Partnership, is the owner of residential real property located
in Manhattan, New York. Originally, Petitioner owned an entire building, and adopted a plan to
convert to condominium ownership. The approximate date of first offering was June 1, 1984. At
such time, the purchase price for 65 residential and 3 professional units was in excess of $10,000,000
pursuant to the offering plan.
Petitioner currently possesses 26 unsold condominium units from the original offering plan.
It is anticipated that the unsold units will have a current fair market value (FMV) ranging from
$40,000 to $60,000 per unit, for a total FMV of approximately $1,110,000. The partnership is
composed of eight partners, the ownership of which is as follows:
Allocation
(1) Ownership
of FMV
Trust
9.00%
$ 99,000
Individual 1
1.50
16,500
Individual 2
1.50
16,500
Individual 3
1.50
16,500
Individual 4
1.50
16,500
Corporation 1
42.50
467,500
Corporation 2
14.16
155,760
Corporation 3
28.34
311,740
100.00%
$1,100,000
The four individual partners, each having a 1.5% ownership interest, are considered the
"low" ownership partners.
The sale of condominium units, in the aggregate have exceeded one million dollars and, thus,
gains tax has been paid on such transfers.
Petitioner, aside from holding the condominium units for sale, acts as a rental agent for some
of the units. A portion of the units remain vacant. A transaction is contemplated in which Petitioner
will terminate and distribute the partnership property in complete liquidation to its partners.
Petitioner's property to be distributed consists mainly of the unsold condominium units.
The actual FMV of these units will be determined by independent appraisal prior to the proposed
transaction. It is planned that the individual unsold condominium units will be distributed to the
various partners in proportion to their respective ownership interests in the partnership. The
allocation of these units to the various partners or distribution raises some problems since each unit
has an estimated FMV ranging from $40,000 to $60,000 per unit. The allocation of unsold
condominium units for distribution to the three corporate partners, which separately have the highest

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Real Property
Transfer Gains Tax
March 19, 1993
ownership percentages, and the trust partner, can be accomplished, with a minimal amount of cash
or other property required to be contributed from or distributed to such partners necessary to equalize
the value of distributions. The four individual partners, each with a 1.5% ownership interest in the
partnership, present some problems. Based upon the estimated FMV of partnership property (the
unsold condominium units) of $1,110,000, each of these individual partners have a proportional
share of an estimated FMV of $16,500. Thus, with the lower range of FMV of unsold units being
approximately $40,000, steps have to be considered to equalize the FMV of distributions according
to the individuals' proportionate interest in the partnership. A number of alternatives have been
considered to accomplish this. None of the ten partners will take the condominium units to be used
as a residence in any of the alternatives, and all of the partners will hold the units for sale.
The initial plan to terminate Petitioner and distribute the property includes the distribution
of only cash or other property, other than realty, to two, and possibly three, of the individual partners
in proportion to their ownership interest in the partnership and thus allowable share of the FMV of
the partnership property. One, or possibly two of the individual partners may contribute cash or other
property to the partnership and be able to receive a distribution of a condominium unit upon
termination of the partnership. The additional cash or other property received by the partnership will
be used to supplement and equalize the distributions to the other partners according to their
respective partnership interests. The ownership interests of the individual partners (1.5% each) is
not material compared to the total FMV of the partnership.
An alternative to the original plan may be to distribute cash or other property only in the total
amount of approximately $66,000 to the four individual partners, having in the aggregate a 6%
ownership interest in the partnership. This portion of the transaction could be accomplished prior
to the termination of the partnership or pursuant to the plan of liquidation. The other partners may
be required to contribute to or receive a distribution from the partnership of cash or other property,
in order to equalize the distributions of realty according to their respective ownership interests, and
to have sufficient funds to accomplish the payment of cash or other property, other than realty, to
the four individual partners.
As a second alternative it may be proposed that the four individual partners, having an
aggregate ownership interest in the partnership of 6%, and possibly the trust partner, having an
ownership interest in the partnership of 9%, receive a distribution of unsold condominium units as
tenants-in-common in proportion to their aggregate ownership interests. The corporate partners, and
possibly the trust partner, if not included with the individuals as tenants in-common, would receive
a distribution of realty according to their respective partnership interests. All of the partners may
have distributions from or require contributions to the partnership of cash or other property solely
to equalize the distribution of condominium units to the respective partners, including those as
tenants-in-common, in proportion to the respective partnership interests.

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Section 1440.7 of the Tax Law provides, in pertinent part, as follows:

7. "Transfer of real property" means the transfer or transfers of any interest
   in real property by any method, including but not limited to sale, exchange,
   assignment, surrender, mortgage foreclosure, transfer in lieu of foreclosure, option,
   trust indenture, taking by eminent domain, conveyance upon liquidation or by a
   receiver, or transfer or acquisition of a controlling interest in any entity with an
   interest in real property.
   ... Transfer of real property shall also include partial or successive transfers,
   unless the transferor or transferors furnish a sworn statement that such transfers are
   not pursuant to an agreement or plan to effectuate by partial or successive transfers
   a transfer which would otherwise be included in the coverage of this article, and the
   transfer of real property by tenants in common, joint tenants or tenants by the
   entirety, provided that the subdividing of real property and the sale of such
   subdivided parcels improved with residences to transferees for use as their
   residences, other than transfers pursuant to a cooperative or condominium plan, shall
   not be deemed a single transfer of real property. For purposes of this article, transfers
   pursuant to a cooperative plan shall include all transfers of stock in a cooperative
   corporation which owns real property. (emphasis added)
   Section 590.35 of the Gains Tax Regulations provides, in part, as follows:
   590.35 Transfers of shares which require payment of tax. [Tax Law, S1440(7)]
   Question: Which transfers of cooperative shares by the person who transfers
   an interest in real property to the cooperative housing corporation (the realty
   transferor), or by the owners of the realty transferor, or by the cooperative
   corporation itself, require payment of tax?
   *

*

*

(f) Transfers by the realty transferor to its owners?
Answer: No, if the realty transferor is a partnership, corporation, or other
entity and transfers the shares to its owners, for investment or resale, in proportion
to their respective ownership interests in the entity, these transfers will not require
payment of tax. This result applies whether the owners hold the shares jointly or
individually, provided that the owners do not take the shares as tenant stockholders.
Following transfers to the owners of the realty transferor which do not require
payment of tax, the owners hold the shares in the place of the realty transferor and
their total original purchase price is equal to that of the realty transferor's
immediately before the transfer ... (emphasis added)

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Section 590.40 of the Gains Tax Regulations provides, in part, as follows:
590.40 Million-dollar exemption. [Tax Law, §§ 1440(7) 1443(1)]
Question: In the case of transfers pursuant to a cooperative plan, how does
the aggregation clause of section 1440(7) of the Tax Law and, accordingly, the $1
million exemption apply to the following transfers?
(a) The transfer of shares by the realty transferor and the owners of the realty
transferor?
Answer: All transfers by the realty transferor are aggregated with all the
transfers by any transferor who received his shares in a transaction that did not
require payment of tax, as described in section 590.35 of this Part, because the
transferee was an owner of the realty transferor. This total aggregation will
determine the application of the $1 million exemption to all transfers by the realty
transferor and to all such owners.
Further, Section 590.44(a) of the Gains Tax Regulation provides as follows:
590.44 Acquisition of a controlling interest. [Tax Law, S1440(2)]
(a) Question: How is the phrase "acquisition of a controlling interest in an
entity with an interest in real property" applied?
Answer: The term controlling interest is defined in section 1440(2) of the
Tax Law to mean:
"(i) in the case of a corporation, either fifty percent or more of
the total combined voting power of all classes of stock of such
corporation, or fifty percent or more of the capital, profits or
beneficial interest in such voting stock of such corporation, and (ii)
in the case of a partnership, association, trust or other entity, fifty
percent or more of the capital, profits or beneficial interest in such
partnership, association, trust or other entity."
Thus, for purposes of the gains tax, in the case of a corporation which has an interest
in real property, the acquisition of a controlling interest in the corporation occurs
when a person or group of persons, acting in concert, acquires a total of 50 percent
or more of the voting stock in such corporation. In the case of a partnership,
association, trust or other entity, the acquisition occurs when a person or group of
persons, acting in concert, acquires a total of 50 percent or more of the capital, profits
or beneficial interest in such entity. Because the statute looks to the acquisition of the
controlling interest, it is the act of the transferee which triggers the tax.

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Section 590.45(d) of the Gains Tax Regulations provides as follows:
(d) Question: If a shareholder acquires a 50-percent interest in a corporation
and gains tax is paid on the transfer, and one year later the same shareholder acquires
an additional 20 percent, is there a second acquisition of a controlling interest?
Answer: Yes. The interests acquired after March 28, 1983 are added together
in determining whether an acquisition of a controlling interest has occurred. No
acquisition of stock will be added to another acquisition of stock if they occur more
than three years apart, unless the acquisitions were so timed as part of a plan to avoid
the gains tax. An example of this would be if T acquired 80 percent of the stock and
simultaneously contracted for the purchase of the remaining 20 percent in three years
and one day.
Regarding issue "1", pursuant to Section 590.35 of the Gains Tax Regulations the transfer
of unsold cooperative shares by a cooperative corporation to the owners of the realty transferor in
proportion to their respective ownership interests in the entity is not subject to gains tax. The
principle established by such regulation would apply to condominium units transferred by the realty
transferor to its owners. Therefore, the transfer of the unsold condominium units to the partners of
Petitioner in proportion to their respective ownership interest would not be subject to gains tax.
Concerning issue "2", provided the distributions from or contributions to the realty transferor
of cash or other property from or to the partners precedes the distribution of the condominium units
to the partners, the distribution of the condominium units to the partners will not be subject to the
gains tax within the principle established by Section 590.35(f) of the Gains Tax Regulations.
It is noted, however, that the distributions from or contributions to the realty transferor of
cash or other property from or to the partners in exchange for or to increase the "low" ownership
partners interest may result in the transfer and acquisition of a controlling interest pursuant to
Section 1440.7 of the Tax Law and Sections 590.44 and 590.45(d) of the Gains Tax Regulations.
Concerning issue "3", provided the distribution from the realty transferor of cash or other
property to the "low" ownership partners in liquidation of their partnership interest precedes the
distribution of the condominium units to the remaining partners, the distribution of the condominium
units to the partners will not be subject to the gains tax within the principle established by Section
590.35(f) of the Gains Tax Regulations.
It is noted, however, that the distribution from the realty transferor of cash or other property
to the "low" ownership partners in liquidation of their partnership interest may result in the transfer
or acquisition of a controlling interest pursuant to Section 1440.7 of the Tax Law and Sections
590.44 and 590.45(d) of the Gains Tax Regulations.

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As for issue "4", provided the contribution or distribution of cash or other property to
equalize value precedes the distribution of the condominium units to the partners in proportion to
their respective ownership interest either individually or as tenants-in-common, such distributions
of units will not be subject to the gains tax within the principle established by Section 590.35(f) of
the Gains Tax Regulations.
It is noted, however, that the distribution from the realty transferor of cash or other property
to equalize ownership interest may result in the transfer or acquisition of a controlling interest
pursuant to Section 1440.7 of the Tax Law and Sections 590.44 and 590.45(d) of the Gains Tax
Regulations.
With respect to issue "5", provided the distributions from or contributions to the realty
transferor of cash or other property from or to the partners precedes the pro rata distribution of the
condominium units to the partners, pursuant to Section 590.35(f) of the Gains Tax Regulations the
original purchase price of such condominium units is equal to that of the realty transferor's
immediately before the transfer.
Where the distributions from or contributions to the realty transferor of cash or other property
to the partners results in the transfer or acquisition of a controlling interest, the original purchase
price of such condominium units as held by the realty transferor may be stepped-up to reflect the
consideration recognized on the transfer of the ownership interest.
It is noted, however, that the distribution of realty to certain "low" ownership partners will
not affect the original purchase price of the condominium units as held by the realty transferor unless
such distribution of realty results in a transfer or acquisition of a controlling interest through the
liquidation of the "low" ownership partner's interest.
Concerning issue "6", pursuant to Section 590.40(a), all transfers by the partners of the
condominium units received from the realty transferor must be aggregated with all the sales made
by the realty transferor for purposes of the $1 million exemption where the units are held by the
partners for investment or resale.

DATED: March 19, 1993

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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