My two-member LLC bought land, built a 40-story building, and plans to convert it into a two-unit condominium, distributing one unit to each member in proportion to their original ownership share. Is distributing the condo units out of the LLC to its members a taxable conveyance for New York's Real Estate Transfer Tax, given we already paid the tax when the LLC bought the land?

Plain-English summary

A two-member LLC bought land in New York City to construct a 40-story building, paying New York's Real Estate Transfer Tax (RETT) on that initial acquisition. One member, a developer/seller of residential condos, would own floors 23–40 (for-sale condo units); the other member, a REIT, would own floors 2–22 (rental apartments) — with each member also getting a share of the lobby and below-ground storage. Once the building's "core and shell" was substantially complete, the LLC planned to convert the building into a two-unit condominium and distribute one "Master Unit" to each member, then liquidate.

From the very start of the project, the members' Operating Agreement kept each member's economics separate: development costs, profits, losses, appreciation, and depreciation attributable to each member's respective floors were tracked in a dedicated capital account for that member, and each member funded 100% of the construction costs specific to its own space (curtain wall, concrete floors, lobby, interior fit-out). Only genuinely shared costs — like pre-acquisition due diligence and permitting — were split by the members' fixed 63%/37% ownership allocation. Neither member had any economic stake in the other's unit.

The Department held that the eventual conveyance of legal title to the two Master Units, from the LLC to its respective members, is exempt from RETT under Tax Law § 1405(b)(6), which exempts conveyances that are a "mere change of identity or form of ownership or organization" involving no actual change in beneficial ownership. The Department reasoned that beneficial ownership of each Master Unit was effectively fixed at the outset of the project by the Operating Agreement's economics — the members had already been bearing the benefits and burdens of ownership of their respective spaces throughout construction — so the later transfer of legal title upon condo conversion doesn't represent a real change in who beneficially owns what. This tracks the Department's own prior rulings TSB-A-01(8)R and TSB-A-12(1)R, which reached the same conclusion for similar LLC-to-member condominium unit distributions. The exemption is conditioned on one key fact holding true: each member's ownership percentage in the finished condominium must match that member's original ownership allocation in the Operating Agreement — if the final split diverges from the original allocation, the "mere change of form" rationale would not apply.

What this means for you

An LLC-to-member condo distribution can be RETT-free if it merely formalizes existing beneficial ownership

If your development entity's governing agreement fixes each member's economic interest in specific, identifiable portions of a project from the outset (separate capital accounts, cost responsibility, and profit/loss allocation tied to each member's own space), a later legal-title conveyance of condominium units to those same members — matching their original economic allocation — can qualify for the Tax Law § 1405(b)(6) "mere change of form" exemption.

The exemption is conditional on the final ownership percentages matching the original allocation

This ruling is explicit that the exemption applies "provided" each member's post-conversion ownership percentage equals their original ownership allocation in the operating agreement. If your deal's final unit allocations end up different from what the operating agreement originally specified, this ruling doesn't support exempting that mismatch.

Document the separateness of each member's economics from day one

The Department's holding leaned heavily on contemporaneous evidence — separate capital accounts, 100%-member-funded construction costs for each unit, and profit/loss tracking specific to each member's space — established in the Operating Agreement from the project's inception, not created retroactively to justify the exemption after the fact.

Common questions

Q: We already paid RETT when our LLC bought the land. Do we owe it again when we distribute the finished condo units to our members?
A: Not necessarily. If each member's beneficial ownership of its unit was fixed from the outset (via separate capital accounts, cost responsibility, and profit/loss tracking) and the final condo ownership percentages match the original operating-agreement allocation, the distribution can qualify as a RETT-exempt "mere change of form" under Tax Law § 1405(b)(6).

Q: Does it matter that only one member managed day-to-day construction as the "Administrative Member"?
A: Not by itself. The ruling focused on the underlying economics -- separate capital accounts, member-funded construction costs, and profit/loss allocation tied to each member's specific unit -- rather than who handled administrative/managerial tasks.

Q: What happens if a member's final condominium ownership share doesn't match their original LLC ownership allocation?
A: The ruling's exemption is expressly conditioned on the percentages matching; a mismatch would take the transaction outside the "mere change of form" rationale this opinion relies on.

Citations and references

Statutes and guidance:

• Tax Law § 1402(a)
• Tax Law § 1401(e)
• Tax Law § 1405(b)(6)
• TSB-A-01(8)R
• TSB-A-12(1)R

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_2015.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a15_2r.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(2)R
Real Estate
Transfer Tax
May 12, 2015

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M140218B

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTED “Petitioner”. Petitioner, a limited liability company with two members (Members),
purchased real property in New York City and is constructing a 40-story building. When the
core and shell of the building are completed, Petitioner will convert ownership of the property to
a condominium with two units and distribute the condominium units to its Members. Petitioner
asks whether this distribution will be exempt from the New York State real estate transfer tax.
We conclude that the conveyances of the units to the respective Members are exempt
from the New York State real estate transfer tax, because the conveyances effectuate a mere
change of identity or form of ownership or organization where there is no change in beneficial
ownership, provided that each Member’s ownership percentage in the Condominium after the
conveyances are completed equates to each Member’s respective original ownership allocation
in Petitioner’s Operating Agreement.
Facts
Petitioner is a limited liability company with two Members. It was formed to acquire real
property in New York City, remove an existing structure, construct a 40-story building, and,
upon substantial completion of the core and shell, convert the building into the Condominium
containing two units (the “Master Units”), each to be solely owned by a Member. One Member,
a special-purpose LLC formed by a developer and seller of residential homes and condominiums,
will own floors 23 – 40 on which for-sale condominiums will be built. The other Member, a
REIT, will own floors 2 – 22 which will house residential apartments for rent. Each Member’s
interest includes designated lobby areas on the first floor and storage facilities below ground.
Petitioner was created to allow a single administrator to manage the construction of the building,
negotiate one primary construction contract, arrange financing, obtain the required permits, and
communicate with third parties and government agencies. To that end, the Members entered into
a purchase agreement with a seller to acquire the property, and then assigned the agreement to
Petitioner. When Petitioner acquired the property, the New York State real estate transfer tax
was paid.
The business model for the project from the inception envisioned that the Members
would each pay for, design, and own their respective floors and public space in the building.
Development costs, as well as the profits and losses and other economics attributable to each
Master Unit, would be earmarked to the respective Member. Although one Member was
designated the Administrative Member of Petitioner with authority to provide day-to-day

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TSB-A-15(2)R
Real Estate
Transfer Tax
May 12, 2015

management and oversight in accord with the business plan, major decisions require unanimous
approval by all non-defaulting members. 1
Under the Operating Agreement, the initial membership interests in Petitioner were
allocated 63% and 37% respectively for the shared development costs, such as due diligence for
acquisition of the real property and certain soft costs, 2 but each Member is obligated to pay for
100% of the work done and costs incurred for construction of its respective curtain wall, concrete
floors and lobby, as well as other costs for work done solely for the benefit of that Member,
including interior construction, fixtures, furnishings and equipment. 3 A separate capital account
was established and maintained for each Member under which the income, deductions, losses, or
other expenditures related solely to that Member’s Master Unit are credited or debited to that
Member’s account respectively. 4 Distributable cash, to the extent realized and specifically
related to the sale of a condominium or rental of an apartment, will be distributed to the
respective Members. 5 Losses and profits that are not related solely to a Master Unit are to be
allocated to the Members pro rata in accordance with each Member’s membership interest. 6
Once substantial completion of the core and shell and the bifurcated condominium
ownership are accomplished, Petitioner will be liquidated, and title to the Master Units will be
assigned to the respective Members.
Analysis
Under Tax Law § 1402(a), a tax is imposed on each conveyance of real property or
interest therein. A “conveyance” means the transfer or transfers of any interest in real property
by any method. See Tax Law §1401(e). A conveyance occurred when Petitioner acquired the
property and the New York State real estate transfer tax was paid on that conveyance. An
additional conveyance will occur when the Master Units are conveyed to the respective Members
after the building is converted to a Condominium. The issue is whether that conveyance is
exempt from the New York State real estate transfer tax.
Petitioner’s Operating Agreement made clear from the beginning of the project that the
sole purpose of Petitioner was to acquire the property, construct the building and file the
Condominium Declaration. Although Petitioner negotiated the construction contract, procured
financing, obtained the necessary governmental permits, and prepared the Master Condominium
documents, each Member was entitled to all the benefits and burdens of ownership and
obligations attributable to each Member’s respective space. Under the Operating Agreement, the
initial membership interests in the Petitioner were allocated 63% and 37% to the two Members.
As the project got underway, these percentages were used to allocate work done and costs
incurred for the shared development costs, such as for the due diligence investigation prior to
closing under the Purchase Agreement, hard and soft costs for design, obtaining governmental

1

Op. Agreement § 7.3.2 and § 7.4.
Op. Agreement § 1.1.64.
3
Op. Agreement § 6.2.1.
4
Op. Agreement § 4.1.
5
Op. Agreement § 8.2.5.
6
Op. Agreement § 8.5.1 and § 8.5.2.
2

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TSB-A-15(2)R
Real Estate
Transfer Tax
May 12, 2015

permits, and the costs of creating the Master Condominium documents. 7 A separate capital
account was established and maintained for each Member, and, although the expenditures for
construction of the respective curtain walls, concrete floors, and lobbies for the Master Units
were considered shared development items, each Member is responsible for capital contributions
amounting to 100% of the work done and costs associated with the construction of its respective
Master Unit. 8
The income, losses, deductions, appreciation, depreciation and related
expenditures attributable to each unit are allocated to the respective Member. Neither Member
has an economic interest in the unit of the other.
In TSB-A-01(8)R, in which an LLC beneficially owned the land and building during the
project’s construction and subsequently conveyed the individual condominium units to the
beneficial owners, we opined that the conversion of the building by the LLC into condominium
units, and the resulting conveyances of legal title of the units to the respective members of the
LLC, constituted a mere change of identity or form of ownership or organization. As such, the
conveyances were exempt from the New York State real estate transfer tax under Tax Law §
1405(b)(6). Also see TSB-A-12(1)R. In this case, the beneficial ownership of each Master Unit
of the building was established at the outset of the project and will continue unchanged until title
is conveyed to the Members that had designed and funded their respective Master Units. Thus,
we conclude that the conversion of the building by Petitioner into a condominium and the
resulting conveyances of legal title of the Master Units to the respective Members of Petitioner
will constitute a mere change of identity or form of ownership or organization where there is no
change in beneficial ownership, provided that each Member’s ownership percentage in the
Condominium after the conveyances are completed equates to each Member’s respective original
ownership allocation in Petitioner’s Operating Agreement. If such is the case, the conveyances
are exempt from the New York State real estate transfer tax.

DATED: May 12, 2015

NOTE:

7
8

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.

Op. Agreement §6.2.3.
Op. Agreement §6.2.1.