A partnership owes $30 million on a nonrecourse mortgage loan, secured by real property worth $10 million plus a $50,000 cash account the bank also has a security interest in. The partners personally guaranteed part of the debt. If the partnership transfers everything to the bank in lieu of foreclosure -- or the bank forecloses and is the winning bidder -- in exchange for cancelling the debt and the guarantees, what's the 'consideration' for New York's Real Property Transfer Gains Tax, and does it matter whether the loan was recourse or nonrecourse?

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 It was repealed for any transfer occurring on or after June 15, 1996.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 1993 opinion is preserved here for historical and research value, not as current law.

A New York partnership owned a leasehold and a fee interest in commercial real property (combined fair market value $10 million) plus a $50,000 cash account. A bank had loaned the partnership $30 million on a nonrecourse basis, secured by a mortgage on the real property; in a later workout, the bank also got a security interest in the cash account, and the partners personally guaranteed part of the debt. After the partnership defaulted, the bank and partnership agreed the partnership would transfer everything -- the real property and the cash account -- to the bank in lieu of foreclosure, in exchange for the bank cancelling the $30 million debt and releasing the partners' guarantees. The agreement didn't separately price the real property versus the cash account.

For transfers occurring before April 15, 1993, the Department explained that "consideration" for a deed-in-lieu-of-foreclosure transfer is the amount of debt cancelled or discharged (former § 1440.1(a)). But because this deal bundled real property with another asset (the cash account) without allocating the price between them, former § 1440.1(c) required apportioning the total consideration based on relative fair market value: the $30,000,000 debt cancellation multiplied by the fraction $10,000,000 (real property FMV) over $10,050,000 (real property plus cash account FMV) -- putting almost the entire $30 million toward the real property's consideration. The Department confirmed the identical result would apply if the transfer instead happened through a formal foreclosure sale where the bank was the winning bidder (former 20 NYCRR § 590.59(d) sets the consideration at the higher of the bid price or the foreclosure judgment amount, generally close to the debt owed) -- assuming the bid didn't exceed the $30 million judgment. And whether the loan was recourse or nonrecourse didn't change the consideration figure calculated as of the transfer date; the only difference a recourse guarantee could make is that if the bank later recovered a deficiency from the guarantors or the partnership itself, the taxpayer could apply for a refund within the time limits of former § 1445. The Department flagged, however, that this whole pre-April-1993 framework had already been superseded by a new statutory consideration formula (former § 1440.1(d), added effective April 15, 1993) for foreclosures and deeds-in-lieu occurring on or after that date.

What this means for you

Lenders and borrowers restructuring troubled mortgage debt

This opinion shows how the now-repealed gains tax valued a deed-in-lieu-of-foreclosure or foreclosure-sale transfer: the taxable "price" was the debt cancelled, not any cash actually changing hands -- and if other collateral (like a cash account) was bundled into the same release, the debt cancellation had to be split by relative fair market value before landing on the real property's share.

Workout and restructuring professionals researching pre-1996 transactions

The rule discussed here applied only to transfers before April 15, 1993; a different consideration formula applied to later foreclosures and deeds in lieu (former § 1440.1(d)), so the timing of an old transaction matters if you're reconstructing its gains-tax exposure.

Accountants evaluating old guarantor deficiency payments

If a recourse guarantor later paid a deficiency judgment after a pre-1996 foreclosure transfer like this one, this opinion confirms that could have supported a gains-tax refund claim under former § 1445, separate from the original consideration calculation.

Common questions

Q: Does this consideration rule still matter today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. Even within the tax's own lifespan, this exact rule applied only to transfers before April 15, 1993; a newer formula applied afterward.

Q: Why did the cash account matter if the transaction was mainly about the real property?
A: Because the bank's total consideration (the $30 million debt cancelled) covered BOTH the real property and the cash account, and the statute required apportioning bundled consideration by relative fair market value when there was no separate price for each asset.

Q: Did it matter that the underlying loan was nonrecourse?
A: Not for calculating the initial consideration as of the transfer date -- that was the same either way. The recourse/nonrecourse distinction only mattered afterward, for whether a guarantor's later deficiency payment could trigger a refund claim.

Q: Can another lender or borrower rely on this exact ruling for a current transaction?
A: No -- apart from the tax's repeal, an Advisory Opinion binds the Department only as to the petitioner and facts presented, and this result depended on the specific pre-April-1993 timing and the exact debt/collateral structure described.

Citations and references

Statutes and regulations:

• former Tax Law § 1440.1(a) (for transfers before April 15, 1993, consideration for a transfer in lieu of foreclosure is the amount of indebtedness cancelled or discharged)
• former Tax Law § 1440.1(c) (where a transfer includes other assets without a reasonable apportionment of consideration, consideration means the portion of total consideration representing the real property's fair market value)
• former Tax Law § 1440.1(d) (a new consideration formula for foreclosure/deed-in-lieu transfers effective for periods on or after April 15, 1993, described in TSB-M-93(1)-R)
• former Tax Law § 1445 (a taxpayer who erroneously paid the gains tax may apply for a refund within two years of the later of the transfer date or the payment date)
• former 20 NYCRR § 590.59(d) (in a mortgage foreclosure, if the mortgagee is the successful bidder, the original purchase price is the higher of the bid price or the foreclosure judgment amount, generally including the mortgage debt, sale expenses, and cost of the action)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a93_11r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (11) R
Real Property
Transfer Gains Tax
June 23, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M930122B

On January 22, 1993, a Petition for Advisory Opinion was received from Andrew Feiner,
Esq. and William Korman, CPA, c/o Zellermayer, Gratch & Jacobs, P. C., 950 Third Avenue, New
York, New York 10022.
The issues raised by Petitioners, Andrew Feiner, Esq. and William Korman, CPA, are:
1.

Assuming the transaction occurred prior to April 15, 1993, what will be the
consideration for the transfer of real property in lieu of foreclosure from a partnership
to a bank for purposes of the Real Property Transfer Gains Tax (hereinafter the "gains
tax").

2.

Whether the result in issue "1" would be different if the real property is transferred
to the bank pursuant to a formal foreclosure proceeding.

3.

Whether the result in issue "1" would be different if the bank loan to the partnership
was a recourse loan.

A partnership owns a leasehold interest in a commercial site and a fee interest in another.
Both the leasehold and the fee interest are situated in New York State. The leasehold and fee interest
have a combined appraised fair market value of $10,000,000. The partnership's only other asset is
a cash bank account in the amount of $50,000.
Several years ago, the bank loaned $30,000,000 to the partnership on a nonrecourse basis,
secured by a mortgage on the leasehold and fee interests. Nearly two years ago, as part of a workout,
the bank received a further security interest in the cash account (by way of a lock-box security
interest in the rent derived from the real property). In addition, A, B and C, the partners of the
partnership, personally guaranteed the interest and a portion of the principal of the debt to the bank.
In exchange for cancellation of the $30,000,000 bank debt and a release of the partners'
guaranty, the bank and the partnership agreed to transfer all of the partnership's property (the real
property and the bank account) to the bank in lieu of foreclosure. The agreement between the bank
and the partnership does not make any allocation of consideration between the real property and the
cash account.
Section 1440.1 of the Tax Law provides, in pertinent part, as follows:

-2­
TSB-A-93 (11) R
Real Property
Transfer Gains Tax
June 23, 1993
Sec. 1440. Definitions.-- In this article:

1. (a) "Consideration" means the price paid or required to be paid for real
   property or any interest therein, less any customary brokerage fees related to the
   transfer if paid by the transferor, including payment for an option or contract to
   purchase or use real property. Consideration includes any price paid or required to
   be paid, whether expressed in a deed and whether paid or required to be paid by
   money, property, or any other thing of value and including the amount of any
   mortgage, purchase money mortgage, lien or other encumbrance, whether the
   underlying indebtedness is assumed or taken subject to. Consideration includes the
   cancellation or discharge of an indebtedness or obligation.
   *

*

*

(c) In the case of a transfer which includes other assets which are in addition to real
property or an interest therein and for which there is no reasonable apportionment of
the consideration for such real property or interest, consideration means that portion
of the total consideration which represents the fair market value of such real property
or interest .... (emphasis added)
Section 1445 of the Tax Law provides, in part, that "[a] person claiming to have erroneously
paid the tax imposed by this article may file an application for refund within two years from either
the date of transfer or the date of payment, whichever is later."
Section 590.59 of the Gains Tax Regulations provides, in pertinent part, as follows:
*

*

*

(d) Question: When property is acquired in a mortgage foreclosure, how is
the original purchase price calculated for a subsequent transfer?
Answer: When the transferor purchased real property at a foreclosure sale
and later sells the property, the original purchase price is the price he paid for the
property (the bid price). In the event the mortgagee is the successful bidder in an
action to foreclose a mortgage, his original purchase price will be the higher of the
price paid (the bid price) or the amount of judgement in foreclosure as established by
the referee to be due the mortgagee. Such amount would generally include the
amount of mortgage debt, the expenses of the sale and the cost of the action.

-3­
TSB-A-93 (11) R
Real Property
Transfer Gains Tax
June 23, 1993
In any event, the successful bidder's original purchase price would be increased by
any other liens that the property was taken subject to, or the bidder became liable for,
along with any capital improvements the bidder made and any allowable selling costs
incurred to sell the property. (emphasis added)
With respect to issue "1", pursuant to Section 1440.1(a) of the Tax Law where real property
was transferred in lieu of foreclosure prior to April 15, 1993, the consideration for such transfer was
the amount of indebtedness or obligation cancelled or discharged as a result of the transfer.
Moreover, pursuant to Section 1440.1(c) of the Tax Law in the case of a transfer which included
other assets which were in addition to real property or interest therein, the consideration must be
apportioned between the real property and the other assets. Accordingly, in the instant case where
the partnership transferred its real property interest and lock-box security interest to the bank in
exchange for cancellation and discharge of its indebtedness, the consideration for the transfer of the
real property was the total consideration for the transfer ($30,000,000) multiplied by a fraction, the
numerator of which was the fair market value of the real property interest being transferred,
($10,000,000) and the denominator was the fair market value of the real property plus the value of
the other assets, ($10,050,000).
Concerning issue "2", pursuant to Section 590.Sg(d) of the Gains Tax Regulations the
consideration for the transfer of real property in a foreclosure sale prior to April 15, 1993 was the
higher of the price paid by the transferee (the bid price) or the amount of the judgement in
foreclosure as established by the referee to be due the mortgagee. Pursuant to Section 1440.1(c) of
the Tax Law, in the case of a transfer which included other assets which were in addition to real
property or an interest therein the consideration must be apportioned between the real property and
the other assets. Therefore, in the instant case in the event of a mortgage foreclosure the result
reached in issue "1" would apply (assuming the judgement in foreclosure was $30,000,000 and the
bid price did not exceed such amount).
As for issue "3", the result reached in issue "1", for purposes of calculating the tax due as of
the date of transfer, would not be different. However, if recovery of any deficiency due the
mortgagee was realized against the guarantors of the partnership's debt or the partnership itself the
taxpayer would be entitled to apply for a refund within the time prescribed by Section 1445 of the
Tax Law.

-4­
TSB-A-93 (11) R
Real Property
Transfer Gains Tax
June 23, 1993
It is noted that for periods commencing on or after April 15, 1993 a different result would
be reached as a result of the amendment of Section 1440.1 of the Tax Law which added a new
paragraph "d". Paragraph "d" established a new method of determining the amount of consideration
in the case of a mortgage foreclosure or a transfer in lieu of foreclosure. (See TSB-M-93(1)-R).

DATED: June 23, 1993

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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