I'm planning a three-step real estate deal: (1) sell a small 5% stake in my two buildings to an outside investor for under $1 million, (2) contribute my and the investor's interests into a new limited partnership, and (3) later sell a 44% limited partnership stake for over $1 million. Does New York's Real Property Transfer Gains Tax apply to any of these three steps?

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, or a controlling interest in an entity holding real property. It was repealed for any transfer occurring on or after June 15, 1996. This 1994 opinion is preserved here for historical and research value, not as current law.

A real estate developer individually owned two separate commercial buildings on a single, easily-divisible parcel -- one worth about $800,000, the other about $3.2 million. He planned three sequential moves: (1) sell a 5% undivided interest in each building to an unrelated individual for less than $1 million total; (2) contribute both buildings to a newly formed limited partnership, leaving him with a 95% interest (51% general partner, 44% limited partner) and the other individual with a 5% limited partnership interest; and (3) later sell some or all of his 44% limited partnership interest to other unrelated buyers, expecting to net roughly $2 million.

Step 1 (the 5% sale): Not taxed, simply because the total consideration was under the gains tax's $1 million threshold (former § 1443.1).

Step 2 (the partnership contribution): Not taxed under the "mere change of identity or form of ownership" exemption (former § 1443.5). Before the contribution, the developer held 95% and the investor held 5% of the buildings directly; after the contribution, the developer held 95% (51%+44%) and the investor held 5% of the partnership. Since each party's beneficial ownership percentage stayed exactly the same -- only the legal wrapper changed, from direct co-ownership to partnership interests -- there was no change in beneficial interest, and the exemption applied.

Step 3 (the later 44% sale): Not taxed either, but for a completely different reason -- the gains tax's controlling-interest rule only reaches the transfer of 50% OR MORE of the capital, profits, or beneficial interest in an entity holding real property (former § 1440.2). Selling up to 44% of the partnership, however much money it generated, simply didn't meet that 50% threshold, so it fell outside the tax's reach entirely, regardless of the $1 million exemption.

What this means for you

Developers and syndicators structuring multi-step real estate deals

Under this now-repealed tax, a real estate deal broken into stages -- a small initial sale, a tax-free contribution to a partnership vehicle, and a later sale of a MINORITY partnership interest -- could clear every stage without triggering the gains tax, as long as (1) each dollar-threshold step stayed under $1 million, (2) the partnership contribution didn't change anyone's underlying beneficial percentage, and (3) no single later sale crossed the 50% controlling-interest line. Structuring around that 50% line (selling 44% rather than 50%+) was a legitimate, opinion-confirmed way to stay outside the tax's reach.

Accountants and real estate attorneys structuring entity-level real estate transfers

This ruling is a clean three-in-one worked example of the gains tax's key thresholds working independently: the $1 million consideration exemption, the mere-change-of-identity exemption for beneficial-interest-preserving restructurings, and the separate 50%-or-more controlling-interest test for entity-level transfers.

Common questions

Q: Does the controlling-interest / 50% threshold still matter for a similar deal today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. Other current NY taxes (like the Real Estate Transfer Tax) have their own separate rules for entity-level transfers of real-property-holding businesses.

Q: Why didn't contributing the buildings to the partnership count as a taxable transfer?
A: Because both the developer and the outside investor kept exactly the same beneficial ownership percentage after the contribution as they had before -- nothing of economic substance changed, only the legal form of ownership, which is exactly what the mere-change exemption is designed to cover.

Q: If the developer had sold 50% or more of the partnership instead of 44%, would that have been taxed?
A: Based on the statute discussed here, yes -- a transfer of 50% or more of the capital, profits, or beneficial interest in a partnership holding real property would meet the "controlling interest" definition and be treated as a taxable transfer of the underlying real property (subject to the usual $1 million and other exemptions).

Q: Can another developer rely on this exact ruling for a similar syndication?
A: No, apart from the repeal -- an Advisory Opinion binds the Department only as to the petitioner and facts presented, and controlling-interest calculations are sensitive to the exact ownership percentages involved.

Citations and references

Statutes and regulations:

• former Tax Law § 1440.2 (definition of "controlling interest": 50% or more of voting power/capital/profits/beneficial interest for a corporation; 50% or more of capital, profits, or beneficial interest for a partnership or similar entity)
• former Tax Law § 1440.7 (definition of "transfer of real property," including the acquisition or transfer of a controlling interest in an entity with an interest in real property)
• former Tax Law § 1441 (imposition of the gains tax at 10% of gain from real property transfers)
• former Tax Law § 1443.1 (the $1 million exemption)
• former Tax Law § 1443.5 (exemption for a transfer that is a mere change of identity or form of ownership or organization, with no change in beneficial interest)
• former 20 NYCRR § 590.44(a) (explains and applies the "controlling interest" definition)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a94_12r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (12) R
Real Property Transfer
Gains Tax
October 18, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M940817A

On August 17, 1994, a Petition for Advisory Opinion was received from Irving H. Levy,
Freed Maxick et al, 800 Liberty Building, Buffalo, New York 14202.
The issues raised by Petitioner, Irving H. Levy, are:
1.

Whether the transfer of 5% interest in real property to an unrelated third party is
subject to the Real Property Transfer Gains Tax (hereinafter the "gains tax").

2.

Whether the transfer of an undivided interest in a building to a limited partnership
constitutes a mere change in the form of ownership and is, therefore, exempt from
the gains tax.

3.

Whether the transfer of 44% of the limited partnership interest to an unrelated
individual for a consideration in excess of $1 million dollars will be subject to the
gains tax.

A real estate developer (the "taxpayer") owns two commercial buildings constructed on a
single parcel of land. The first building was constructed during 1978. The second building was
constructed during the period 1989-1993. The buildings are separate and distinct buildings
constructed on the single parcel of land which is easily divisible. One building has a fair market
value of approximately $800,000. The other building has a fair market value of approximately $3.2
million. The taxpayer owns both buildings in his capacity as an individual.
It is the taxpayer's intention to sell a 5% undivided interest in each building to an unrelated
third party individual for less than one million dollars in the aggregate. The taxpayer and this
individual will then contribute their interests in both buildings to a newly formed limited partnership.
The taxpayer will own 95% of the partnership in the form of a 51% general partnership interest and
a 44% limited partnership interest. The other individual will own a 5% limited partnership interest.
Subsequent to the formation of the limited partnership, the taxpayer owning the 44% limited
partnership interest will sell to other unrelated individuals some or all of this 44% limited partnership
interest.
If the taxpayer is successful in selling the 44% limited partnership interest, he will realize
approximately $2 million in proceeds (Approximately $800,000 in cash and $1.2 million in
assumption of partnership liabilities.)

-2­
TSB-A-94 (12) R
Real Property Transfer
Gains Tax
October 18, 1994
Pursuant to Sections 1441 and 1443.1 of the Tax Law and Section 590.1 of the Gains Tax
Regulations the gains tax is a ten percent tax on the gain derived from the transfer of real property,
which includes the acquisition or transfer of a controlling interest in any entity with an interest in real
property, where the property is located in New York State and where the consideration for the
transfer is one million dollars or more.
Section 1440.2 of the Tax Law provides as follows:

2. "Controlling interest" means (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.
   Section 1440.7 of the Tax Law defines the term "transfer of real property", in part, to mean
   the transfer or transfers of any interest in real by any method. This would include a transfer or
   acquisition of a controlling interest in any entity with an interest in real property.
   Section 1443 of the Tax Law provides, in pertinent part, as follows:
   Sec. 1443. Exemptions.--A total or partial exemption shall be allowed in
   the following cases:
   *

*

*

5. If a transfer of real property, however effected, consists of a mere change
   of identity or form of ownership or organization, where there is no change in
   beneficial interest.
   Section 590.44(a) of the Gains Tax Regulations provides as follows:
   (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 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."

-3­
TSB-A-94 (12) R
Real Property Transfer
Gains Tax
October 18, 1994
With respect to issue "1", taxpayer is transferring a 5% undivided interest in each building
to an unrelated third party for a consideration in the aggregate of less than one million dollars.
Pursuant to Section 1443.1 of the Tax Law and Section 590.1 of the Gains Tax Regulations, the
gains tax does not apply to the transfer of real property where the consideration for the transfer is less
than one million dollars. Therefore, since the consideration received by taxpayer for the transfer of
the 5% undivided interest is less than one million dollars, the transfer of such interest is not subject
to the gains tax.
Regarding issue "2", Section 1443.5 of the Tax Law exempts from the gains tax the transfer
of real property where transfer, however effected, consists of a mere change of identity or form of
ownership or organization and does not result in a change in the beneficial interest in the real
property. In the instant case, taxpayer holds a 95% undivided interest in two buildings and an
unrelated third party holds the remaining 5% undivided interest. Following the contribution of the
buildings to a limited partnership, taxpayer will have a 95% interest in the partnership (a 51%
general partnership interest and a 44% limited partnership interest) and the unrelated third party will
hold a 5% limited partnership interest in the partnership. Therefore, as a result of the transfer of the
interests in the buildings to the partnership, the taxpayer and the unrelated third party will continue
to own the same beneficial ownership interest in the buildings through their ownership interests in
the partnership. Accordingly, pursuant to Section 1443.5 of the Tax Law such transfer will constitute
a mere change of identity or form of ownership or organization since there is no change in beneficial
interest and will not be subject to the gains tax.
Concerning issue "3", pursuant to Section 1440.7 of the Tax Law and Section 590.44(a) of
the Gains Tax Regulations the term transfer of real property includes the acquisition or transfer of
a controlling interest in any entity with an interest in real property. Pursuant to Section 1440.2 of the
Tax Law the term controlling interest is defined in the case of a partnership to mean the acquisition
or transfer of fifty percent or more of the capital, profits or beneficial interest in such partnership.
Accordingly, since the taxpayer is transferring less than fifty percent of his interest in the partnership
and the other unrelated individual or individuals will acquire less than fifty percent of the interest
in the partnership, such transfer does not constitute the transfer or acquisition of a controlling
interest. Therefore, the transfer by the taxpayer and the acquisition by the other individual(s) will not
be subject to the gains tax.

DATED: October 18, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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