Straight Talk
By James E. Helmus
Mere Change Provisions Need Unity
In May 2008, the Mets and Yankees had wrapped up their sub- way series, and the Detroit Red Wings were still battling the Pittsburgh Penguins in the Stanley Cup finals.
But there was a different kind of action going on in Trenton.
On May 30, 2008, with little fanfare, significant changes to the existing realty transfer fee rules were adopted by the New Jersey Division of Taxation. They created a mere change exemption from the
realty transfer fee for certain transactions that do not change the
beneficial ownership of an entity that holds New Jersey real property. Little more than one year later, very few real estate owners
and investors understand the implications of this change.
There had been significant outcry in the taxpayer community
for such an exemption since New Jersey adopted the controlling
interest transfer provisions in its realty transfer fee rules back in
August 2006. The rule allows an exemption on the realty transfer
fee if a transfer of 50% or more of an entity that holds New Jersey
real property does not change the entity’s beneficial ownership.
The newly enacted provisions were effective July 7, 2008 and will
expire on July 7, 2013.
A new “Example 6” has been added to N.J.A.C. 18:16A- 1. 1 and
illustrates this provision, which is as follows:
“A limited partnership, which owns a 100% interest in classified
real property and is owned by partners G1, L1, L2 and L3, is dissolved, and the ownership interest of the partners are collectively
“This disparity in treatment between deed transfers and controlling interest transfers hould be brought to the attention of the New Jersey legislature.”
JAMES E. HELMUS
Schonbraun McCann Group
transferred to one newly created LLC. The equalized assessed value
of the property is $10 million. Each former partner’s membership
interest in the LLC is equal to their share in the dissolved partnership. G1 owned 51% of the partnership and owns 51% interest in
the LLC. Because the transfer of G1’s interest in the partnership
to the LLC is a mere change in identity of the controlling interest
in the property and there was no change in beneficial ownership,
the transfer is not subject to the tax.”
This change is significant since the former “Example 6” that
was removed from the modified rule specifically provided that
this transaction would have been subject to the New Jersey realty
transfer fee. The new N.J.A.C. 18:16A- 1. 1 effectively changes the
taxable answer previously provided in New Jersey State Tax News to
a non-taxable answer.
While a step in the right direction, the favorable changes to
N.J.A.C. 18:16A- 1. 1 apply only to transactions involving entity
interest transfers, and not to real property transfers involving an
actual deed recordation. The rules governing these transactions
(N.J.A.C. 18: 16-6. 1) continue to impose the realty transfer fee on
a deed transferring real property from one legal entity to another
that has common ownership.
Further, it provides that the taxable consideration includes the
monetary value of stock transferred or contribution of capital by
the grantor.
The existence of N.J.A.C. 18: 16-6. 1 continues to be extremely
problematic for the taxpayer community since lenders in refinancing situations require the transfer of a subject property deed to a
newly formed entity owned by the borrower.
Although such transactions do not result in a change in the ultimate beneficial ownership of the property, they are nonetheless
subject to the 1% tax applicable to controlling interest transfers
pursuant to N.J.A.C. 18: 16-6. 1. The newly adopted mere change
rule under N.J.A.C 18:16A- 1. 1, as applied to controlling interest
transfers, would result in the non-imposition of the New Jersey
realty transfer fee had the same transaction been structured as an
entity interest transfer instead of a straight deed transfer.
This disparity in treatment between deed transfers and controlling interest transfers should be brought to the attention of the
New Jersey legislature so that necessary action can be taken to
level the playing field. The neighboring states of New York and
Connecticut both have similar favorable mere change provisions
in their respective statutes that apply equally to both deed transfers and controlling interest transfers. New Jersey should follow
suit and change or eliminate N.J.A.C. 18: 16-6. 1.
The state has already proved that it is reasonable in adopting
the new controlling interest mere change provisions of N.J.A.C.
18:16A- 1. 1. Now it needs to take the further step and apply such
logic to real property deed transfers.
Lastly, the taxpayer community should work together with their
political representatives to ensure that the newly enacted provisions are extended and do not expire on the scheduled date of
July 7, 2013.—RENJ
The views expressed here are those of the author and not those of
Real Estate New Jersey.
James E. Helmus is a New York City-based senior managing
director in the state and local tax practice at the Schonbraun
McCann Group, an FTI Co. Contact him at jhelmus@smgllp.com.
