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Digging Deeper: What You Need to Know About the Recently Expanded Grantee Fee (Mansion Tax) and the New Transferee Tax

 

As of August 1, 2006, purchasers of commercial properties – and transferees of a controlling interest in entities that own commercial properties - have to dig deeper into their pockets.

 

The law that previously required purchasers of certain residential and farmland properties to pay a fee equal to 1% of total consideration paid, where the consideration was in excess of $1,000,000 (the so-called Mansion Tax), has been expanded to include purchases of commercial property. Furthermore, a new law requires the payment of a 1% tax in connection with the purchase or transfer of a controlling interest in an entity that owns commercial property.

 

A new law, P.L. 2006, c.33, approved on July 8, 2006, requires the purchaser of a commercial property to pay a fee equal to 1% of the entire amount of consideration paid for such property. The 1% fee applies only if the total amount of the consideration is in excess of $1,000,000.

 

State regulations require municipal tax assessors to classify each property on their municipal tax lists into certain categories. Vacant land is categorized as Class 1 property. Class 2 properties are residential properties designed for the use and enjoyment by not more than four families, including residential condominiums. Class 3A properties are those used for agricultural or horticultural purposes. Class 3B properties are those that have qualified and are assessed under the Farmland Assessment Act. Class 4A properties are income-producing properties not classified into Classes 1, 2, 3A, 3B, 4B or 4C. Class 4B properties are industrial properties and Class 4C properties are apartments designed for use by five families or more. Tax assessors’ classifications of properties are not necessarily controlling for purposes of determining if the grantee fee is applicable.

 

The grantee fee (i.e., the so-called Mansion Tax) previously applied to the conveyance of Class 2 and Class 3A properties only. However, the 1% grantee fee now must be paid in connection with the conveyance of Class 4A properties. The fee must be paid to the county recording officer at the time a deed is presented for recording, together with an affidavit stating the consideration paid by the grantee (for a form of grantee affidavit, visit the New Jersey Division of Taxation’s website at www.state.nj.us/treasury/taxation). The fee is not applicable if the grantee is a 501(c)(3) tax-exempt organization or if the transfer of the property is incidental to a corporate merger or acquisition and the equalized assessed value of the property conveyed is less than 20% of the total value of all assets exchanged in the merger or acquisition.

 

The new law took effect on August 1, 2006 and, therefore, the grantee fee does not apply to deeds recorded before August 1, 2006. Furthermore, the grantee fee does not apply to transactions where the sale/purchase contract for Class 4A property was fully executed before July 1, 2006, and the deed is recorded on or before November 15, 2006. However, in such instances, the 1% fee must be paid and a refund requested by filing a claim with the New Jersey Division of Taxation within one year of the date of the recording of the deed. 

 

On July 8, 2006, the Legislature also enacted a new law, N.J.S.A. 54:15C-1, that requires a purchaser/transferee of a “controlling interest” in an entity that possesses, directly or indirectly, an interest in Class 4A real property, to pay a tax in an amount equal to 1% of the total consideration paid, where the total consideration is in excess of $1,000,000. A “controlling interest” means “in the case of an entity that is a corporation, more than fifty percent of the total combined voting power of all classes of stock of that corporation, and in the case of an entity that is a partnership, association, trust or other organization, more than fifty percent of the beneficial ownership of [Class 4A property] of that partnership, association, trust or other organization.” If the purchase/transfer of the controlling interest occurs through a series of transactions that occur within six months of each other, all such transactions shall be considered to be one transaction for purposes of determining whether or not the transferee tax applies.

 

As is the case with the grantee fee described above, the transferee tax does not apply in instances in which the transfer occurs on or before November 15, 2006, and the contract or other binding agreement pursuant to which the transfer was made was fully executed before July 1, 2006. The new transferee tax does not apply (i) to any sale or transfer by or to the United States, New Jersey or any instrumentality, agency or subdivision thereof, (ii) to a transaction that is subject to the grantee fee described above, (iii) if the purchaser is a 501(c)(3) tax-exempt organization, (iv) if the transfer of the property is incidental to a corporate merger or acquisition and the equalized assessed value of the property transferred is less than 20% of the total value of all assets exchanged in the merger or acquisition, and (v) under certain other limited circumstances.

 

Whether negotiating a contract or gearing up for an upcoming closing, parties involved in the sale and purchase of a commercial property - or a controlling interest in an entity that owns a commercial property – must be aware of the recently adopted laws concerning the grantee fee and the new transferee tax.