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Real Estate Alert

July 2004

Effective August 1, 2004 New Laws Will Increase Realty Transfer Fees and Require Withholding of Gross Income Tax for Non-Resident Taxpayers

By Noel M. Spear, Esq.

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• r the second time in as many years, the

New Jersey Legislature has increased the Realty Transfer Fees payable on certain transfers of real property. These increases will take effect on August 1, 2004 and consist of: (i) a substantial increase in fees for transfers of real property valued at more than $350,000, (ii) a “mansion” tax to be paid by the buyer

• f residential real property valued at

more than $1,000,000 in the amount of 1% of the entire purchase price, and (iii) withholding of gross income tax on capital gains for sellers of New Jersey property who are not New Jersey residents. The revenue generated by these increased fees will be used for general State purposes.

New Fee For Transfers In Excess Of $350,000

Prior to July 15, 2003, the Realty Transfer Fee contained two components: the basic fee ($3.50 per thousand of consideration), plus an additional fee ($1.50 per thousand over $150,000). The law that went into effect on July 15, 2003 added a supplemental fee of $.50 per thousand for the first $150,000; $1.70 per thousand for $150,000 to $200,000 and $2.80 per thousand thereafter. That increase has not been changed and remains in effect. The new law adds a new component to the Realty Transfer Fee, called a “general purpose fee,” which only applies to transfers made for more than $350,000. The general purpose fee ranges from $1.80 to $4.30 per thousand, depending on the amount of consideration, and is calculated from the first dollar. The general purpose fee is in addition to the basic, additional and supplemental fees described above. The following chart may be used to determine the standard realty transfer fee for consideration of less than $350,000:

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This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. 65 Livingston Avenue www.lowenstein.com

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Roseland, New Jersey 07068-1791 Telephone 973.597.2500 Fax 973.597.2400

Amount of Consideration Fee per $1000 From To 150,000 $4.00 150,001 200,000 $6.70 200,001 350,000 $7.80 If the deed consideration is over $350,000, the following chart (which includes the new general purpose fee) may be used: Amount of Consideration Fee per $1000 From To 150,000 $5.80 150,001 200,000 $8.50 200,001 550,000 $9.60 550,001 850,000 $10.60 850,001 1,000,000 $11.60 OVER one million $12.10 A partial exemption against the Basic Fee remains in effect for a one or two family residence,

• wned and occupied by a senior citizen (over age

62), or blind or disabled person or for the sale of low and moderate income housing. Note that the law only states that the county recording officer must collect the Realty Transfer Fee when the deed is submitted for recording. The law does not specify which party must pay the Realty Transfer Fee at the closing. The Realty Transfer Fee has been customarily paid by the seller and we expect that custom to continue, including the recent increases, although sellers may insist that the sales price may be increased by some amount to offset this impact.

Mansion Tax

In addition to the increased Realty Transfer Fee described above, as of August 1, 2004, the buyer of a residential property for consideration in excess of $1,000,000 must pay a fee of one percent (1%) of the entire purchase price. Note that this fee applies to transfers of land, which is “zoned for residential use,” regardless of whether a house or other improvements have been constructed thereon.

Withholding Of Gross Income Tax For Non-Resident Taxpayers

Nonresident taxpayers will be required to pay estimated gross income taxes on the capital gains realized on the sale of any real property in New Jersey after August 1, 2004. This requirement

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applies to non-resident individuals, estates and

• trusts. Note that even if the seller is a resident of

New Jersey, a form certifying that the sale is not subject to the requirement to pay the gross income tax must be included when submitting the deed for recording. The amount of gain is computed based on federal income tax criteria, but may not be less than 2% of the consideration stated in the deed. The non-resident taxpayer must estimate the amount of gross income tax due using an estimated tax rate that is equal to the highest rate of tax for the taxable year. The estimated tax form must be completed whether there is a gain or loss on the sale of the property. The only exceptions to the requirement of payment of estimated gross income taxes by non- resident individuals, trusts and estates are as follows:

• a. if the real property being sold is used

exclusively as the principal residence of the seller;

• b. if the transfer is a deed in lieu of

foreclosure or by a deed in satisfaction of a foreclosure proceeding with no additional consideration; and

• c. if the seller is an agency of the United

States, State of New Jersey, Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association or a private mortgage insurance company.

Conclusion

The recent amendments to the Realty Transfer Fee statute represent a significant increase in transaction costs for sale of New Jersey real estate. Strong market conditions, due in large part to historically low interest rates and the availability of capital, should mitigate the initial impact of these

• fees. In any case, we expect to close an unusually

high number of transactions during the month of July as our clients accelerate their closings in order to avoid these new fees. For more information and counseling as to what appropriate steps your company should take at this time, please contact Noel M. Spear at 973.597.2330

• r nspear@lowenstein.com.

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