I'm constructing an office building floor-by-floor as tenants sign leases, rather than all at once. For gains-tax purposes, can I allocate construction-period interest, real property taxes, insurance, security, and specifically identified indirect project costs to each floor in proportion to that floor's share of the building's total square footage, counting costs only through the date each floor's construction is finished?

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 It was repealed for any transfer occurring on or after June 15, 1996.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 1987 opinion is preserved here for historical and research value, not as current law.

45 Broadway Atrium Partners, a New York partnership, owned and leased an office building at 45 Broadway in New York City, financed first by Manufacturers Hanover Trust Company and later by Aetna Life Insurance Company. Construction started in March 1982 and proceeded in two stages: the first stage (foundation, shell, core, and lobby) was substantially complete by August 1983, evidenced by a temporary certificate of occupancy; the second stage -- fitting out individual floors to each new tenant's specifications, including air-conditioning, sprinklers, flooring, lighting, and partitions -- began in April 1984 and was still ongoing, with completion estimated for late 1988, as each floor's lease was separately signed. Because the building wasn't finished all at once, the Partnership proposed allocating construction-period interest, real property taxes, insurance, security, and specifically identified indirect project costs to each floor in proportion to that floor's share of total building square footage, and including those costs in the building's original purchase price only through the date each floor's own construction ended.

The Department confirmed that construction-period interest, taxes, insurance, security, and specifically identified indirect project costs are all includible in the cost of a capital improvement under former 20 NYCRR § 590.16(d) -- with a distinction between "indirect project costs" that clearly relate to a specific project (fully includible) and general/administrative overhead costs like corporate management salaries or general accounting expenses (never includible). Because the regulations don't specify exactly how to allocate these costs across a project completed in stages, the Department ruled that the Partnership's proposed square-footage-based, floor-by-floor allocation method would be accepted as a proper method, so long as it results in an equitable allocation. It also flagged former 20 NYCRR § 590.16(e)'s separate rule: if construction activity is suspended between the two stages, the costs allowed during a construction period stop accruing during that gap.

What this means for you

Developers building out office space floor-by-floor for different tenants

When a building is completed in stages rather than all at once, you don't need to use a single building-wide cost allocation -- a floor-by-floor (or section-by-section) method tied to square footage was an acceptable way to determine what "original purchase price" costs each part of the building carried, as long as the allocation was equitable.

Real estate accountants tracking capital-improvement costs during a phased construction project

Indirect project costs that clearly relate to a specific construction project (a field office, its administrative staff) were fully includible; costs that are really general corporate overhead (management salaries, general legal/accounting expenses) were never includible, regardless of how a phased-construction allocation method is designed.

Tax attorneys advising on multi-year, multi-tenant build-out projects

Watch for gaps in construction activity between stages -- the regulations treated a suspension in construction (for market-driven reasons like insufficient leasing demand) as ending the construction period for cost-accrual purposes during that gap, even if construction later resumed.

Common questions

Q: Does this construction-cost-allocation rule still matter today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. Other tax contexts (like federal basis calculations) have their own separate rules for allocating construction costs.

Q: Why does the allocation method matter if the total costs stay the same either way?
A: Because the gains tax is triggered by a TRANSFER of real property, and different floors, units, or portions of a phased project could be transferred separately (sold, leased with an option, etc.) at different points -- so how costs get allocated to each piece affects that piece's individual original purchase price if it's transferred on its own.

Q: What happens to construction costs incurred during a gap between construction stages?
A: They aren't included -- former 20 NYCRR § 590.16(e) provides that if construction activity is suspended before a project is completed, the construction period is treated as having ended, and costs incurred during that suspension are not added to original purchase price.

Q: Can another developer completing a project in stages rely on this exact ruling?
A: No, apart from the repeal -- an Advisory Opinion binds the Department only as to the petitioner and facts presented, though the regulation's flexible "equitable allocation" standard applied generally while the tax existed.

Citations and references

Statutes and regulations:

• former 20 NYCRR § 590.16(d) (construction-period interest, taxes, insurance, and specifically identified indirect project costs are includible in the cost of a capital improvement; general/administrative overhead costs are not)
• former 20 NYCRR § 590.16(e) (the construction period ends when the property is substantially complete and ready for use; for staged projects, allowable costs cease on each completed part; a suspension of construction activity ends the construction period for cost-accrual purposes)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a87_4r.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-87 (4) R
Real Property Transfer
Gains Tax
April 10, 1987

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. M870219A

On February 19, 1987, a Petition for Advisory Opinion was received on behalf of 45
Broadway Atrium Partners, located at 126 East 56th Street, 30th Floor, New York, New York
10022.
The issue raised is whether the method proposed by the Petitioner for determining the amount
of construction period interest, construction period real property taxes, insurance, security and
specifically identified indirect project costs to be included in the original purchase price of a building
for purposes of computing the Real Property Transfer Gains Tax imposed by Article 31B of the Tax
Law (hereinafter the "Gains Tax") would be accepted by the Department of Taxation and Finance.
The facts as presented by the Petitioner are as follows: 45 Broadway Atrium Partners, a New
York partnership, (hereinafter the "Partnership"), owns an office building, (hereinafter the
"Building") in New York City at 45 Broadway. Financing for the construction of the Building was
provided first by Manufacturers Hanover Trust Company and then by Aetna Life Insurance
Company. The Partnership, as lessor, has leased and intends to continue to lease floors of the
building to individual tenants and has completed construction on some of the floors in the Building
and intends to complete construction of the balance of the floors in the Building according to tenants'
specifications.
Construction began in March of 1982 and occurred in two stages: During the first stage, the
Building's foundation, shell (including external walls), core and lobby were substantially completed,
as evidenced by the issuance of a temporary certificate of occupancy.
The first stage of construction was substantially completed in August, 1983. During the
second stage, the Partnership enters into leases covering one or more floors with individual tenants
and completes construction of the leased floor(s) according to the particular tenant's specifications.
The second stage of the construction is now ongoing and includes as to each floor the installation
of air-conditioning ducts, sprinkler systems, flooring, ceiling, lighting, electrical and telephone
outlets, and any necessary partitions on the particular leased floor(s). The second stage of the
construction began in April, 1984 and depending on market conditions, the Partnership estimates that
the second stage of construction will be completed in the last quarter of 1988.
The Petitioner proposes that for purposes of computing the original purchase price of the
Building, since the construction of the Building will not be completed at a single time, but rather on
a floor by floor basis, as each floor is completed, interest on loans incurred in connection with the
construction of the Building, construction period real property taxes, insurance, security and
specifically identified indirect project costs will be allocated to a particular floor in proportion to the

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

FRANK J. PUCCIA, DIRECTOR

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER

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TSB-A-87 (4) R
Real Property Transfer
Gains Tax
April 10, 1987

ratio of that floor's square footage to the Building's total square footage. Such amounts will be
included in such original purchase price to the extent paid or accrued through the date that
construction ends with respect to that floor.
Gains Tax regulations 590.16(d) in describing the costs to be included as costs of
constructing capital improvements states in pertinent part as follows:
(d)

Q.

What additional costs are allowed if incurred during a construction
period?

A.

Other costs that are clearly associated with construction of a real
estate project can also be included as a cost of constructing a capital
improvement. If the capital improvement requires a construction
period, a period of time in which necessary activities are conducted
to bring the improvement on the real property to that state or
condition necessary for its intended use, the interest cost paid during
that period on a construction loan, real property taxes, insurance or
similar items are includible as a cost of construction.

Also, section 590.16(d) of the Gains Tax regulations states in pertinent part as follows:
Indirect project costs may also be included in original purchase price if they are
specifically identified with a project. Indirect project costs are indirect costs incurred
after the acquisition of the property, such as construction administration costs, legal
fees, and various office costs (cost accounting expenses, design costs, and other
expenses of departments providing services to projects), that clearly relate to projects
under construction. The full amount of indirect project costs that clearly relate to a
specific project, such as costs associated with a field office at a project site and the
administrative personnel that staff the office, may be added to the cost of the capital
improvement. However, indirect project costs which relate to numerous projects must
be allocated in a rational manner to the projects to which the cost relate based on the
nature of activity that gave rise to the costs.
Indirect project costs that do not clearly pertain to projects under construction
and all general and administrative costs cannot be added to the cost of capital
improvement. General and administrative costs include such costs as corporate
management salaries, general accounting expenses, corporate office expenses, general
legal fees, and similar costs which are generally incurred by all enterprises in the
conduct of business.

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TSB-A-87 (4) R
Real Property Transfer
Gains Tax
April 10, 1987

In addition, section 590.16(e) of the Gains Tax regulations states, in pertinent part,:
The construction period ends when the real property is substantially complete
and ready to be placed in service. Some construction projects are completed in
sections, leaving part of the real property capable of being used independently while
construction continues on other sections. For such projects, allowable construction
period expenses shall cease on each part when it is substantially complete and ready
for use. A construction period for a project may be suspended before a project is
completed for various reasons, such as insufficient sales or insufficient rental
demands. In such a case, the construction period has ended, and the costs allowed
during a construction period will no longer be allowed.
Based on the foregoing, the costs of interest on construction loans incurred in connection with
the construction of the Building, construction period real property taxes, insurance, security, and
specifically identified indirect project costs accruing during a construction period are allowed as costs
of constructing of a capital improvement. The method of allocating such costs in the case of a
construction project which is completed in steps is not specifically stated in the Gains Tax regulations.
However, the method chosen by the Petitioner of allocating such costs would be deemed a proper
method as long as it resulted in an equitable allocation.
Also, as provided at Section 590.16(e), if there is a suspension of the construction activity
between the end of the first stage of construction and the beginning of the second stage the costs
allowed during a construction period will no longer be allowed between such stages.

DATED: April 10, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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