As sponsor of a non-eviction cooperative conversion, I estimated the Real Property Transfer Gains Tax consideration for my unsold shares based partly on a wraparound mortgage. I'm now negotiating to give the co-op board back my unsold, underperforming shares, and as an incentive I'll reduce the underlying mortgage by $375,000. Does that mortgage reduction lower my gains-tax consideration?

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 It was repealed for any transfer occurring on or after June 15, 1996.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.

Westside Platinum Associates was the sponsor of a non-eviction cooperative offering plan. For gains-tax purposes, the sponsor calculated the "anticipated consideration" for each apartment sold under the plan based on the unit's cash sale price plus its share of the underlying cooperative wraparound mortgage. By 1993, some of the sponsor's remaining unsold shares were losing money (rent collections falling well short of the maintenance charges owed on them). To fix this, the sponsor proposed negotiating with the cooperative board to have the board take back those unsold, underperforming shares -- and, as an incentive for the board to agree, the sponsor would reduce the underlying mortgage by $375,000. The sponsor gave a worked numerical example showing how a $375,000 mortgage reduction would lower the total projected gain and gains tax on the whole plan (from $87,500 down to $50,000 in its illustration).

The Department explained the rule for calculating consideration on cooperative-plan unit transfers (former § 1442(b), former 20 NYCRR § 590.36): the mortgage on the underlying property is allocated across all the shares, and any mortgage principal payments made WHILE a unit's shares are still held reduce that unit's consideration -- but once shares are actually SOLD and the transfer has occurred, the consideration for THAT transfer is fixed and can't be reduced retroactively by a later event (citing the Tax Appeals Tribunal's Matter of V & V Properties, Matter of Cheltoncort Co., and Matter of Perry Thompson Third Co. decisions). So the mortgage reduction attributable to units the sponsor had ALREADY sold doesn't change anything -- consideration on those past sales was locked in when each transfer happened. But the portion of the $375,000 reduction attributable to the units the sponsor is now transferring BACK to the cooperative board (still unsold, so their consideration isn't yet fixed) DOES reduce the consideration on that transfer -- calculated as $375,000 multiplied by the fraction of unsold shares being transferred over the total number of shares in the plan. The sponsor should reflect that reduced consideration when it next files a required update under the Department's cooperative-plan safe harbor procedure (TSB-M-86(3)R).

What this means for you

Cooperative sponsors dealing with underperforming unsold units

Under this now-repealed tax, an incentive like a mortgage reduction offered to get a co-op board to take back troubled shares could lower your gains-tax exposure -- but only for the pro-rata slice of the reduction tied to the units actually being transferred in that deal, not units you'd already sold years earlier.

Real estate attorneys structuring cooperative-plan workouts

This opinion is a clean illustration of the "consideration is fixed at the time of transfer" principle from the Tax Appeals Tribunal trilogy (V & V Properties, Cheltoncort, Perry Thompson Third) applied specifically to mortgage adjustments on cooperative wraparound financing.

Accountants preparing cooperative-plan gains-tax update filings

If you're reconstructing a pre-1996 cooperative plan's required periodic gains-tax updates (per TSB-M-86(3)R), this opinion shows exactly how a later mortgage adjustment should (and shouldn't) flow through to the consideration reported for different tranches of unit transfers.

Common questions

Q: Does this consideration-allocation 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 cooperative transactions.

Q: Why couldn't the mortgage reduction lower the tax on units already sold?
A: Because Tax Appeals Tribunal precedent established that consideration for a real property transfer is fixed at the time that transfer occurs and can't be reduced by later events -- otherwise sponsors could retroactively rewrite the tax base on closed transactions.

Q: How exactly was the reduction allocated to the unsold shares?
A: By multiplying the total $375,000 mortgage reduction by a fraction: the number of unsold shares being transferred to the cooperative board, over the total number of shares under the entire cooperative plan.

Q: Can another cooperative sponsor 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 allocation depended on Westside Platinum's specific plan structure and the timing of the proposed mortgage reduction relative to its unit sales.

Citations and references

Statutes and regulations:

• former Tax Law § 1442(b) (for a cooperative-plan transfer, an apportionment of the original purchase price and total anticipated consideration is made for each cooperative unit)
• former 20 NYCRR § 590.36 (a mortgage on the property transferred to the cooperative corporation is included as consideration, allocated among shares; mortgage principal payments made WHILE shares are still held reduce that unit's consideration, but not after a unit's shares have already been sold)
• TSB-M-86(3)R, "Safe Harbor Estimate for Transfers Pursuant to Condominium and Cooperative Plans" (May 1, 1986) (sponsors must estimate anticipated plan consideration initially and update it at each required update point)
• Matter of V & V Properties, Dec. Tax App. Trib., July 16, 1992 (original purchase price/consideration is determined at the time of the acquisition/transfer and cannot be reduced by subsequent events)
• Matter of Cheltoncort Co., Dec. Tax App. Trib., December 5, 1991 (same principle)
• Matter of Perry Thompson Third Co., Dec. Tax App. Trib., December 5, 1991 (same principle)

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_7r.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-93 (7)R
Real Property
Transfer Gains Tax
May 21, 1993

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M930204A

On February 4, 1993, a Petition for Advisory Opinion was received from Westside Platinum
Associates, 117 Cuttermill Road, c/o Einhorn, Great Neck, New York 11021.
The issue raised by Petitioner, Westside Platinum Associates, is whether a reduction in the
principal of the underlying mortgage will reduce the anticipated consideration to be recognized under
a cooperative plan for purposes of the Real Property Transfer Gains Tax (hereinafter the "gains tax").
Petitioner is the sponsor of a non-eviction cooperative offering plan. For purposes of the
gains tax, Petitioner anticipated the consideration to be received under the plan based upon the cash
price for the units and an apportionment of the cooperative apartment owner's share in the underlying
cooperative wrap-around mortgage.
It is proposed that Petitioner will negotiate with the cooperative board of directors (the
"cooperative board") to acquire unsold cooperative shares held by Petitioner which are subject to
substantial shortfalls (rent collections much less than cooperative maintenance requirements). As
an incentive for the cooperative board taking back the unsold cooperative shares, Petitioner will
reduce the underlying mortgage by $375,000.
Petitioner provides the following example:
June 8, 1986
Prior to
Mortgage Allowance
Total Cash Proceeds
Mortgage Receivable
Projected Sale Price

$1,000,000
1,875,000
$2,875,000

Estimated Costs
Projected Gain
Gains Tax Due

$2,000,000
$ 875,000
$ 87,500

1993
Mortgage
Reduction

(375,000)
(375,000)

(375,000)

After
Mortgage Allowance
$1,000,000
1,500,000
$2,500,000
$2,000,000
$ 500,000
$ 50,000

Section 1442(b) of the Tax Law provides, in part, that for purposes of calculating the amount
of tax due for a transfer pursuant to a cooperative plan, an apportionment of the original purchase
price of the real property and total consideration anticipated under such cooperative plan shall be
made for each cooperative unit transfer.

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TSB-A-93 (7)R
Real Property
Transfer Gains Tax
May 21, 1993
Section 590.36 of the Gains Tax Regulations provides as follows:
590.36 Mortgages.
Question: How does a mortgage on the real property transferred to the
cooperative corporation affect the calculation of the gains tax?
Answer: The amount of any mortgage to which the real property is subject
when transferred by the realty transferor to the cooperative corporation, and any
mortgage taken back by the realty transferor, is included as consideration to the realty
transferor. The amount of any such mortgage is allocated among any shares sold by
the cooperative corporation, to the shares taken back by the realty transferor and to
the shares held by the owners of the realty transferor, if such owners received their
shares in a transfer that did not require payment of tax, as described in section 590.35
of this Part.
If while the realty transferor, or any such owner of the realty transferor, holds the
shares, payments are made on mortgage principal, through the payment of monthly
maintenance charges, the amount of such mortgage principal payments will reduce
the consideration received on the sale of the shares. This is so whether the mortgage
is held by a third party or by the realty transferor.
Where the real property was transferred to the cooperative corporation prior to March
29, 1983, subject to a mortgage, or a mortgage was taken back by the realty
transferor, the total amount of any such mortgage is also allocated to the shares sold
by the cooperative corporation and to the shares which the realty transferor took
back. To the extent these shares are sold pursuant to the cooperative plan on or after
March 29, 1983, the amount of such mortgages allocated to such shares, reduced by
principal payments made by the realty transferor with respect to such shares, will be
subject to the gains tax.
In Matter of V & V Properties, Dec Tax App Trib, July 16, 1992, the Tax Appeals Tribunal
stated that, "[O]ur conclusion, which determines the amount incurred to acquire an interest in real
property at the time of the subject acquisition for purposes of establishing original purchase price,
is consistent with the conclusion that the amount of consideration received for the transfer of real
property must be determined at the time that the transfer occurred, and that the consideration cannot
be reduced on subsequent events (Matter of Cheltoncort Co., Dec Tax App Trib, December 5, 1991;
Matter of Perry Thompson Third Co., Dec Tax App Trib, December 5, 1991)."
Safe Harbor Estimate for Transfers Pursuant to Condominium and Cooperative Plans, TSBM-86(3)R, May 1, 1986 provides, in pertinent part, that each transferor of shares pursuant to a
cooperative plan will be required to estimate the consideration that he will receive pursuant to the
plan. This estimate of consideration on the entire plan will be made on the initial Gains Tax
submission for the plan and at each required update point of the plan.

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TSB-A-93 (7)R
Real Property
Transfer Gains Tax
May 21, 1993
Pursuant to Section 1442(b) of the Tax Law and Section 590.36 of the Gains Tax Regulations
to determine the anticipated consideration to be received pursuant to the cooperative plan, the
Petitioner must allocate any mortgage taken back by Petitioner among any shares sold by the
cooperative corporation, to the shares taken back by the Petitioner and to the shares held by the
owners of the Petitioner. The consideration is then fixed on a unit by unit basis as each unit is
transferred.
Accordingly, pursuant to Matter of V & V Properties, supra, Matter of Cheltoncort Co.,
supra, and Matter of Perry Thompson Third Co., supra, the mortgage reduction which is attributable
to the units previously sold by Petitioner is not a reduction in consideration since the consideration,
including the pro rata share of the mortgage taken by Petitioner attributable to such units, was fixed
at the time of transfer to the unit purchasers. However, Petitioner may reduce the consideration to
the extent that the mortgage reduction is attributable to the unsold shares being transferred to the
cooperative board.
Therefore, based on Petitioner's example, to determine the mortgage reduction attributable
to the unsold shares being transferred to the cooperative board, the mortgage reduction of $375,000
must be multiplied by a fraction, the numerator of which is amount of unsold shares being
transferred to the cooperative board and the denominator of which is the total number of shares
pursuant to the cooperative plan. Pursuant to TSB-M-86(3)R, supra, such reduction in consideration
should be shown by Petitioner when Petitioner's submits it's next required update.

DATED: May 21, 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.