My mortgage lender foreclosed on 10 unsold condo units and bought them back at a foreclosure sale. Is New York's Real Property Transfer Gains Tax consideration the actual foreclosure bid price, or the much larger unpaid mortgage debt -- and does construction money my lender agreed to cover on my behalf also count as 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 It was repealed for any transfer occurring on or after June 15, 1996.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 1995 opinion is preserved here for historical and research value, not as current law.

Port Jefferson Development Corp. built 133 condominium units, financed substantially by a mortgage from Norstar Bank. When the mortgage went into default with roughly $3,073,079 owed (all principal, interest, and other additions), the bank foreclosed on the remaining 10 unsold units and took them back at the foreclosure sale, free and clear of its own lien, for a stated sale price of $1,100,405 -- proceeds it applied against the outstanding debt. Separately, the bank agreed, as part of the arrangement, to pay $579,400 of construction costs Port Jefferson had incurred but not yet paid.

Port Jefferson filed a gains-tax refund claim treating its total consideration for all 133 units at $19,421,925 (based on actual sale prices for the first 123 units, plus the $1,100,405 for the last 10). The Department's Audit Division denied the refund, insisting the consideration for the 10 foreclosed units should instead be the full $3,073,079 mortgage debt, plus the $579,400 in bank-covered construction costs.

The Department sided with its own Audit Division on both points. Its regulations specifically addressed this scenario: when the MORTGAGEE is the successful bidder in its own foreclosure action, the consideration (or "original purchase price," for a later resale) is the HIGHER of the actual bid price or the amount of the judgment in foreclosure -- which generally includes the mortgage debt, sale expenses, and costs of the action. Since the $3,073,079 judgment amount exceeded the $1,100,405 bid price, the higher figure controlled. Separately, because a transferee's agreement to pay a debt the transferor owes counts as additional consideration (the same rule applied in TSB-A-95(14)R for a broker's tax payment), the bank's $579,400 payment of Port Jefferson's construction costs -- made as a condition of the transfer -- was also added to the consideration.

What this means for you

Developers whose lender forecloses and buys back unsold units

Under this now-repealed tax, a mortgagee taking back property at its own foreclosure sale couldn't rely on a modest "bid price" to minimize your gains-tax consideration if the actual mortgage debt (the foreclosure judgment amount) was higher -- the higher of the two numbers controlled. If your lender also agrees to absorb any of your other unpaid obligations as part of the deal, that gets added to consideration too.

Lenders taking real estate collateral back through foreclosure

This ruling illustrates how a lender's own credit bid at foreclosure, plus any additional debts of the borrower it agrees to cover, can combine to push a transaction's gains-tax consideration well above what the cash price alone would suggest -- relevant to structuring workouts and understanding the borrower's resulting tax exposure.

Bankruptcy and workout attorneys handling distressed condominium projects

If you're untangling the tax history of a bankrupt developer's foreclosed units, this opinion shows how the "higher of bid price or foreclosure judgment" rule and the transferee-pays-transferor's-debt rule stack together in a single distressed transaction.

Common questions

Q: Does the "higher of bid price or judgment amount" rule still apply to New York foreclosures today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. Other current tax rules (including federal rules on cancellation of debt and foreclosure gain/loss) apply their own separate consideration and basis concepts.

Q: Why wasn't the actual $1,100,405 bid price used as consideration?
A: Because the regulation specifically required using the HIGHER of the bid price or the foreclosure judgment amount when the mortgagee itself is the successful bidder -- a rule meant to prevent a lender-buyer from bidding low and understating the transaction's true value.

Q: Why did the bank's payment of Port Jefferson's construction costs count as consideration?
A: Because it was a discharge of Port Jefferson's own debt/obligation, made as a condition of the transfer -- the same underlying rule (a transferee relieving the transferor of a debt equals additional consideration) applied to a real estate broker's tax payment in a separate opinion, TSB-A-95(14)R.

Q: Can another developer or lender rely on this specific ruling for their own foreclosure?
A: No, apart from the repeal -- an Advisory Opinion binds the Department only as to the petitioner and facts presented, and the outcome here depended on the specific foreclosure judgment amount and the separate construction-cost agreement.

Citations and references

Statutes and regulations:

• former Tax Law § 1440.1(a) (definition of "consideration": price paid or required to be paid, including discharge of an indebtedness or obligation)
• former Tax Law § 1440.5(a) (definition of "original purchase price": consideration paid or required to be paid by the transferor to acquire the interest)
• former Tax Law § 1441 (imposition of the gains tax at 10% of gain, for transfers with consideration of $1 million or more)
• former Tax Law § 1443.1 (the $1 million exemption)
• former 20 NYCRR § 590.10(a) (a transferee's agreement to pay a debt the transferor owes constitutes additional consideration)
• former 20 NYCRR § 590.59(d) (when a mortgagee is the successful bidder in its own foreclosure, original purchase price/consideration is the higher of the bid price or the foreclosure judgment amount, generally including the mortgage debt, sale expenses, and costs of the action)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a95_7r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (7)R
Real Property Tax
August 22, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M950215B

On February 15, 1995, a Petition for Advisory Opinion was received from Port Jefferson
Development Corp., c/o Robert Pryor, Esq., Pryor & Mandelup, P.C., 675 Old Country Road,
Westbury, New York 11590.
The issues raised by Petitioner, Port Jefferson Development Corp., are:
1.

Whether for purposes of the Real Property Transfer Gains Tax (the "gains tax") the
consideration received by Petitioner from the transfer of 10 units in a foreclosure
proceeding was the bid price from the sale of the units or the amount of the unpaid
mortgage debt.

2.

Whether for purposes of the gains tax construction costs in the amount of $579,400,
incurred but not yet paid by Petitioner was to be included in the consideration
received by Petitioner from the transfer of the condominium units pursuant to the
condominium plan.

Petitioner was formed for the purpose of acquiring property and constructing condominium
units thereon. Petitioner ultimately acquired property and constructed 133 condominium units
thereon. A significant portion of the funds that it used to acquire the property and construct the
condominium units was borrowed from Norstar Bank (the "Bank") in the form of a mortgage secured
by the property and condominium units.
At some point in time, the Bank declared that the mortgage was in default approximately at
a time when the total mortgage indebtedness (inclusive of all principal, interest and any other
additions) totaled $3,073,079. Petitioner states that as a result of the Bank's foreclosure, the
remaining 10 units on hand were sold at a foreclosure sale to the Bank free and clear of the Bank's
mortgage lien for a total sales price of $1,100,405. The net sales proceeds were used to pay down
the mortgage leaving an approximate mortgage balance of $2,000,000 which, to date, has never been
reduced or modified. However, the Tax Department's Audit Division (the "Audit Division") included
the total mortgage indebtedness in computing the consideration received by Petitioner from the
transfer of the 133 condominium units.
In addition, at or about the time of the sale of the 10 units, Petitioner incurred but has not
paid construction costs of $579,400. Petitioner states that the Audit Division erroneously added this
amount to the consideration it received from the transfer of the 133 condominium units.

-2­
TSB-A-95 (7)R
Real Property Tax
August 22, 1995
On July 20, 1993, Petitioner filed a claim for refund and reported a total consideration of
$19,321,520 received for all 133 units sold including the 10 units at issue. The consideration of
$19,321,520 was equal to the sum of (a) the actual sales price of the initial 123 units of $18,521,520
and (b) the estimated sales price of the remaining 10 units of $1,000,000. Petitioner, however,
concedes that the actual consideration for the sale of the remaining 10 units was actually $1,100,405
rather than its original estimate of $1,000,000 and that the total sales price received for the sale of
the 133 units was $19,421,925.
On May 19, 1995, the Audit Division denied Petitioner's claim for refund On the basis that
the consideration should include the total mortgage indebtedness as well as the amount of the
construction costs incurred by the Petitioner. The Audit Division stated that where the mortgagee
is the successful bidder in an action to foreclose a mortgage the consideration for the transfer of real
property is the higher of the bid price or the amount of judgment in foreclosure. Thus, since the
mortgagee was the successful bidder in the foreclosure proceeding, the consideration was the total
mortgage indebtedness of $3,073,079. In addition, the Audit Division stated that by agreement the
Bank agreed to pay the construction cost incurred by Petitioner but not yet paid in the amount of
$579,400. Therefore, such payment by the Bank constituted consideration to Petitioner for the
transfer of the 10 condominium units.
Petitioner has filed a bankruptcy petition and currently remains under the jurisdiction of the
Bankruptcy Court. The Joint Disclosure Statement pursuant to Section 1125 of the Bankruptcy Code
states as follows:
a. Secured Claim (Class 1). Class 1 consists of the senior Secured Claim of
Norstar, arising out of its mortgage lien of the Units. As of the Commencement Date,
the outstanding indebtedness owed by the Debtor to Norstar under the Loan
Agreements was $3,073,079.12. However, because Norstar's mortgage lien was
released on twenty-two units without payment of the appropriate release payments,
Norstar's Claim is currently undersecured. The Proponents believe that the remaining
ten Units have a gross sale value of approximately $800,000, which is the amount of
the highest all-cash offer to purchase the Units that the Debtor has made known to
the Proponents.
Upon the Effective Date, Norstar will receive that portion of the Escrow
Account which represents Release Funds held in trust for Norstar from the sale of its
collateral, which on January 1, 1991 amounted to approximately $198,167.37. In
addition, as payment of its Class 1 Claim, upon the Effective Date Norstar will
receive the Units, free and clear of all liens and encumbrances subject only to the
terms of the following paragraph.
Over the course of this proceeding, the Fox Meadow Condominium
Homeowner's Association (the "Homeowner's Association") and the Class 3 Trust
Fund Creditors have separately questioned the priority of Norstar's mortgage lien on
the Units, each arguing that their respective Class 6 and Class 3 Claims have a prior
entitlement to the Units and/or the proceeds of the sale of the Units. Norstar has
disputed and continues to dispute the merit of both of those claims. However, both

-3­
TSB-A-95 (7)R
Real Property Tax
August 22, 1995
of these claims are settled under the Plan. Pursuant to an agreement between Norstar
and the Homeowner's Association dated June 11, 1990, which agreement is annexed
as Exhibit A to the Plan and incorporated therein, the Homeowner's Association have
abandoned their claim to a senior interest in the Units in consideration of Norstar's
agreement to pay all outstanding condominium maintenance charges in full from the
proceeds, if any, of sale of the Units by Norstar to a third party or parties. The
Homeowner's Association has, pursuant to that agreement, assigned its Class 6 Claim
to Norstar to the extent of payments made pursuant to the Agreement.
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 any interest in
real property, which includes the acquisition or transfer of a controlling interest in any entity with
an interest in real property, where the real property is located in New York State and where the
consideration for the transfer is one million dollars or more.
At the time of the transfer of the 10 condominium units, Section 1440.1 of the Tax Law
defined the term "consideration", in part, to mean:

1. (a) "Consideration" means the price paid or required to be paid for real
   property or any interest therein, less any customary brokerage fees related to the
   transfer if paid by the transferor, including payment for an option or contract to
   purchase or use real property. Consideration includes any price paid or required to
   be paid, whether expressed in a deed and whether paid or required to be paid by
   money, property, or any other thing of value and including the amount of any
   mortgage, purchase money mortgage, lien or other encumbrance, whether the
   underlying indebtedness is assumed or taken subject to. Consideration includes the
   cancellation or discharge of an indebtedness or obligation. (emphasis added)
   In addition, at the time of the transfer of the 10 condominium units, Section 590.10(a) of the
   Gains Tax Regulations provided as follows:
   590.10

Transferee Pays Debt of Transferor [Tax Law, § 1440, subd. 1.)
(a)

Question: Does the payment of legal fees by the transferee
constitute additional consideration if the lawyer was retained
by the transferor, but it is agreed that the fee is to be paid by
the transferee?
Answer: Yes. Such payment by the transferee would
constitute a discharge of an indebtedness or obligation of the
transferor and would be additional consideration. This is true

-4­
TSB-A-95 (7)R
Real Property Tax
August 22, 1995
for any case in which the transferee agrees or is directed to
pay a debt the transferor owes.
Moreover, at the time of the transfer of the 10 condominium units, Section 590.59 of the
Gains Tax Regulations provided, in part, as follows:
*
(d)

*

*

When property is acquired in a mortgage foreclosure, how is
the original purchase price calculated for a subsequent
transfer?
Answer: When the transferor purchased real property at a
foreclosure sale and later sells the property, the original
purchase price is the price paid for the property (the bid
price). In the event the mortgagee is the successful bidder in
an action to foreclose a mortgage, his original purchase price
will be the higher of the price paid (the bid price) or the
amount of judgment in foreclosure as established by the
referee to be due the mortgagee. Such amount would
generally include the amount of mortgage debt, the expenses
of the sale and the cost of the action . . . .

Although the above cited regulation only makes reference to the method to be used to
establish the mortgagee's "original purchase price" of the real property received in a foreclosure
proceeding, at the time of the transfer of the units to the Bank, Section 1440.5(a) of the Tax Law
defined the term "original purchase price" to mean the consideration paid or required to be paid by
the transferor to acquire the interest in real property.
Accordingly, with respect to issue "1" since the Bank was the successful bidder and received
the 10 condominium units in a foreclosure proceeding, pursuant to Section 1440.1(a) of the Tax Law
and Section 590.59(d) of the Gains Tax Regulations as cited herein, the consideration from the
transfer of the 10 units includes the higher of the price paid (the bid price) or the amount of judgment
in foreclosure. In the instant case, assuming the total mortgage indebtedness of $3,073,079 represents
the amount of the judgment in foreclosure, this amount was required to be included in the
consideration for the transfer, as it was higher than the bid price of $1,101,405.
Concerning issue "2", the Bank, by agreement, agreed to pay the construction costs incurred
by Petitioner but not yet paid in the amount of $579,400 as a condition of the transfer of the 10
condominium units to the Bank. Pursuant to Section 1440.1(a) of the Tax Law and Section 590.10(a)
of the Gains Tax Regulations as cited herein, the discharge by the transferee of an indebtedness or

-5­
TSB-A-95 (7)R
Real Property Tax
August 22, 1995
obligation of the transferor as a condition of the transfer of the real property to the transferee is
deemed a consideration for the transfer of the real property. Therefore, since the Bank relieved
Petitioner of its obligation to pay the construction Costs in the amount of $579,400, such amount
constitutes consideration received by Petitioner for the transfer of the 10 condominium units.

DATED: August 22, 1995

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

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