I was set to close on the sale of my mother's residence, but the buyer refused to close, claiming we needed a full gains-tax pre-transfer audit and tentative assessment instead of the simple exemption affidavit we offered. Was the affidavit actually enough?

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 It was repealed for any transfer occurring on or after June 15, 1996.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 1997 opinion addresses a transaction from just before the repeal and is preserved here for historical and research value, not as current law.

Bonnie Lee Smith and her husband bought a single-family residence in New Rochelle in 1961 and lived there for decades; after her husband died and their children moved out, Ms. Smith continued living there alone (though, in her later years, she also kept a secondary apartment near her Bronx business for convenience). Due to her advancing senility, she fell behind on property taxes, and New Rochelle foreclosed on the residence in 1993, excluding her from her own home. After her daughter was appointed her guardian and litigated to recover the property, New Rochelle returned the (by-then storm- and vandalism-damaged) residence to Ms. Smith in late 1994. Unable to afford repairs, the guardian arranged to sell it for $500,000, with Ms. Smith retaining a life estate over part of the home. Hours before the scheduled 1995 closing, the buyer claimed the sale required a full gains-tax pre-transfer audit and Tentative Assessment (Form TP-582) rather than the simpler Real Property Transfer Gains Tax Affidavit (Schedule B of Form TP-584) the seller had prepared, and refused to close -- leading to litigation between the parties.

Former Tax Law § 1443.2 exempted from the gains tax any property that was "occupied and used by the transferor as his or her residence." Former § 1447(1)(f) allowed a seller to use the simpler affidavit, in lieu of the full pre-transfer audit procedure, specifically for transfers that qualified for that residential exemption. The only real question for the Department was whether Ms. Smith's temporary exclusion from the home (because of the town's improper foreclosure) changed its character as her personal residence. The Department said no: the forced absence didn't change the nature of the property as Ms. Smith's personal residence, so the transfer would have qualified for the residential exemption, and the affidavit -- not the full pre-transfer audit and Tentative Assessment -- would have sufficed to meet the gains tax's filing requirement. The Department noted the parties could also have chosen to use the full audit procedure instead if they preferred that certainty, but it declined to decide which method the parties' sale contract actually obligated them to use -- that was a contract dispute, not a tax question.

What this means for you

Sellers and their attorneys handling a residence with an interrupted occupancy history

Under this now-repealed regime, a temporary, involuntary loss of possession (here, a wrongful municipal foreclosure later reversed through litigation) didn't disqualify a property from the seller's personal-residence exemption, as long as the property remained, in substance, the seller's home throughout. That reasoning about "what counts as your residence despite an interruption" could be a useful analogy in other NY tax contexts using a similar residence test, even though this specific tax is gone.

Title companies and closing attorneys revisiting old, unresolved gains-tax closings

If you're untangling a stalled or disputed closing from the gains-tax era over which filing method (affidavit vs. full pre-transfer audit) applied, this opinion confirms both were valid compliance paths where the residential exemption applied -- the Department won't resolve which one a specific contract required, since that's a matter of contract interpretation between buyer and seller, not tax law.

Accountants and estate administrators

The gains tax offered a lighter-weight compliance option (the affidavit) specifically to avoid burdening straightforward, clearly-exempt residential sales with the full audit and assessment process. This ruling is a good illustration of that policy in action.

Common questions

Q: Does the Real Property Transfer Gains Tax, or its affidavit filing option, still apply to home sales today?
A: No. The entire tax was repealed for transfers on or after June 15, 1996. Current New York home sales are subject to different taxes (such as the Real Estate Transfer Tax), not this one.

Q: Did the Department decide whether the seller breached the sale contract by not providing a TP-582?
A: No. The Department explicitly said it was "not within this Department's province to determine the respective contractual obligations of the parties" -- it only answered the tax-law question of which filing method the gains tax itself required or permitted.

Q: Why didn't the forced foreclosure disqualify the residential exemption?
A: Because the exclusion was involuntary and the result of the town's own legal wrongdoing (later reversed), the Department treated the home as never having lost its character as Ms. Smith's personal residence.

Q: Could a buyer insist on the full pre-transfer audit procedure even where a seller qualifies for the residential exemption?
A: The Department confirmed both the affidavit and the full pre-transfer audit procedure were valid ways to comply with the gains tax's filing rule when the residential exemption applied -- so a contract could specify either, but the tax law itself didn't mandate the more burdensome option once the exemption applied.

Citations and references

Statutes:

• 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 § 1443.2 (exemption for property occupied and used by the transferor as a residence)
• former Tax Law § 1447(1)(a) (Commissioner prescribes gains tax filing forms)
• former Tax Law § 1447(1)(d) (forms filed under the pre-transfer audit procedure)
• former Tax Law § 1447(1)(f) (recording officers require a Tentative Assessment/Return or a qualifying affidavit; affidavit available for transfers exempt under § 1443.2)
• Chapter 309, Laws of 1996 (repealed the gains tax for transfers occurring on or after June 15, 1996)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a97_3r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(3)R
Real Property
Transfer Gains Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.M961031A

On October 31, 1996, the Department of Taxation and Finance received a
Petition for Advisory Opinion from the Estate of Bonnie Lee Smith, 344 Central
Park Avenue, Scarsdale, New York, 10583.
The issue raised by Petitioner, the Estate of Bonnie Lee Smith, is whether
the Real Property Transfer Gains Tax Affidavit could have been used to comply
with the Real Property Transfer Gains Tax (the gains tax) filing requirements.
That is, would it have been necessary to comply with the gains tax pre-transfer
audit procedure and submit a gains tax tentative assessment and return in lieu
of using the affidavit to comply with these filing requirements?
Petitioner submits the following facts as the basis for this Advisory
Opinion. On October 11, 1961, John and Bonnie Lee Smith purchased a single family
residence (the "residence") at 151 Kensington Oval in New Rochelle, New York. The
residence was used exclusively as the personal residence of the Smiths and their
children. By the end of 1975 John Smith had died and the Smith's children had
moved out. Thereafter, Ms. Smith continued to live in the residence alone.
Ms. Smith continued to use the residence exclusively as her residence
through 1993. She did, however, within this time period, use an apartment within
her business located in the Bronx as a secondary residence, since, because of her
advancing years she found it more and more difficult to regularly commute back
and forth from the house to the business.
In 1987, Ms. Smith stopped paying property taxes on some of the real
property that she owned, including the residence and real property she owned in
New York City, because she had failed to properly manage her business affairs.
The Petitioner states that the failure to pay these property taxes was due to Ms.
Smith suffering from senility. Because of this non-payment of taxes both the
City of New York and the City of New Rochelle (New Rochelle) commenced in rem
foreclosure proceedings against Ms. Smith's properties.
In 1993, New Rochelle foreclosed on Ms. Smith's residence by means of a
default judgment and excluded her from the house. Thereafter, New Rochelle
commenced the process of placing the property up for auction.
In August 1993, Ms. Smith's daughter, Debra Smith, moved by order to show
cause to stay the auction of Ms. Smith's properties and for the appointment of
a Guardian for the person and property of Ms. Smith. On October 29, 1993, Debra
Smith was appointed as Guardian for Bonnie Lee Smith by order of the Hon. Louis
C. Palella, J.S.C., and an injunction, staying the sale of the properties, was

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Real Property
Transfer Gains Tax

entered. Upon qualifying as Guardian, Debra Smith immediately entered into
negotiations with the City of New York and the City of New Rochelle for the
return of Ms. Smith's properties. Debra Smith brought a motion to vacate New
Rochelle's title on the ground that New Rochelle had taken Ms. Smith's property
without due process of law. It was alleged in the motion that New Rochelle had
commenced an in rem action and taken a default judgment against an incompetent.
The Court denied the motion and ruled that Ms. Smith had to proceed by plenary
action. In denying the motion, the Court directed that the injunction be vacated
in or about August 1994.
In August 1994, New Rochelle again attempted to auction Ms. Smith's
residence. Debra Smith immediately filed a lis pendens and commenced a plenary
action to void New Rochelle's title, alleging that it had taken Ms. Smith's
property without due process of law.
In October 1994, New Rochelle entered into a settlement on the record with
Debra Smith whereby the residence was to be returned to Ms. Smith in exchange for
payment for the back taxes and a portion of the outstanding interest and
penalties. In November 1994, Debra Smith paid the back taxes and penalties after
closing on the sale of one of her other properties, and New Rochelle tendered a
quit claim deed transferring any claimed interest in the residence to Ms. Smith.
By the time the residence was returned to Ms. Smith, it was uninhabitable.
The beach front property had been heavily damaged by storms. In addition, vandals
had damaged the property during the period that she was excluded from the
residence. Moreover, Ms. Smith had no funds with which to repair the residence.
In order to properly provide for Ms. Smith, it was decided that the residence
should be sold.
On November 11, 1994, Debra Smith, as Guardian for Ms. Smith, entered into
a contract to sell the residence to John Ortiz.
The sale price was set at
$500,000. The contract provided that Ms. Smith was to retain a life estate
permitting her to reside in the lower level of the residence. The Court approved
the sale and a closing date of January 31, 1995 was set. It was subsequently
changed to April 6, 1995.
A few hours before the scheduled closing, the purchaser notified the
attorney for Debra Smith that the contract to purchase had been assigned. In
addition, the purchaser stated that the transfer could not close because they
lacked a necessary gains tax waiver (the gains tax Tentative Assessment and
Return-Form TP-582) in the name of a newly disclosed assignee. Subsequently, the
attorney for John Ortiz was advised that Debra Smith was ready, willing and able
to close, and that a gains tax waiver was unnecessary because the residence was
used and wholly occupied by Ms. Smith as a residence. Therefore, a Real Property
Transfer Gains Tax Affidavit (Schedule B of Form TP-584) could have been
submitted at the closing in compliance with the gains tax filing requirements for
this particular transfer. At this point, John Ortiz refused to close claiming
that a TP-582 was required.
The purchaser and the alleged assignee never
appeared at the scheduled court ordered closing.

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Real Property
Transfer Gains Tax

Approximately one week later, the attorney for John Ortiz filed a lis
pendens and commenced an action against the estate claiming that Ms. Smith failed
to tender all the documents necessary to close on April 6, 1995. Specifically,
it was claimed in the action that the transfer could not have closed because they
lacked the proper TP-582.
On March 25, 1996, Ms. Smith died. Because the residence had been heavily
damaged during her absence, she never had the opportunity to move back in as it
was uninhabitable. However, her personal possessions remained in the residence
and at no time was the residence ever used for non-residential or commercial
purposes nor was it ever depreciated.
Section 1441 of the Tax Law imposed the gains tax on the gain derived from
the transfer of real property or an interest therein, where the real property was
located in New York State and where the consideration for the transfer was $1
million or more. Chapter 309 of the Laws of 1996 repealed the gains tax for
transfers of real property that occurred or occur on or after June 15, 1996.
Section 1443.2 of the Tax Law provided an exemption from the tax to the
extent that the real property that was transferred consisted of premises occupied
and used by the transferor as his or her residence (but only with respect to that
portion of the premises actually occupied and used for residential purposes).
Section 1447(1)(a) of the Tax Law provided as follows:
The commissioner of taxation and finance shall make available forms
which he shall prescribe, to be completed by each transferor and
transferee for each transfer for which an affidavit is not
prescribed in clause (ii) of subparagraph one of paragraph (f) of
this subdivision occurring after the effective date of this article.
Section 1447(1)(d) set forth as follows:
Such forms shall be filed with the state tax commission in
accordance with the pre-transfer audit procedure established by the
commissioner of taxation and finance pursuant to subdivision two of
this section.
Section 1447(1)(f) of the Tax Law mandated that, with certain exceptions
not relevant to this advisory opinion, a recording officer could not record or
accept for record any conveyance unless accompanied by a statement of tentative
assessment and return (which was obtained by complying with the pre-transfer
audit procedure) or an affidavit which could be used if the conveyance met
certain statutorily prescribed conditions. As set forth in subclause (F) of this
section, one of the transfers for which the affidavit could be used in lieu of
complying with the pre-transfer audit procedure was a transfer which was exempt
from the gains tax pursuant to section 1443.2 of the Tax Law.

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Real Property
Transfer Gains Tax

The only issue which needs to be settled here is whether the proposed
transfer of the residence by Ms. Smith to John Ortiz or his assigns which was
to close on April 6, 1995 would have been exempt pursuant to section 1443.2 of
the Tax Law.
Based on the facts presented, if the transfer on April 6, 1995 had
occurred, it would have constituted a transfer of real property consisting of
premises used by the transferor as her personal residence. Ms. Smith's exclusion
from the premises by New Rochelle because of her tax problems did not change the
nature of the real property as her personal residence. Therefore, the filing of
an affidavit pursuant to Section 1447(1)(f) of the Tax Law would have sufficed
with respect to the proposed transfer by Ms. Smith.
Alternatively, if the
parties so desired based on their uncertainty as to whether the proposed transfer
qualified for the residential exemption provided by Section 1443.2 of the Tax
Law, the pre-transfer audit procedure could have been used, culminating with the
issuance of a tentative assessment and return with respect to the proposed
transfer to comply with the gains tax filing requirements. In summary, the
parties had the option of using either method to accomplish compliance with the
gains tax filing requirements. It is not within this Department's province to
determine the respective contractual obligations of the parties to the
transactions described in this petition for advisory opinion.

DATED:

March 28, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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