I'm structuring a turnkey deal where I sell my client a vacant lot, buy it back at the same price, build a building on it as construction financing, then sell (or lease) the finished building back to the client. Will New York's Real Property Transfer Gains Tax apply when I transfer the finished building back?

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 It was repealed for any transfer occurring on or after June 15, 1996.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.

Deegan Development Group, Inc. owned a parcel of land (part of a larger tract it had bought three years earlier) and proposed a "turnkey" construction arrangement with its client. Under the primary plan, Deegan would sell the land to its client at Deegan's original purchase price, then immediately buy it back at that same price, build a building on the land, and upon completion sell the finished building and land back to the client. As an alternative, instead of selling the finished project, Deegan would lease the completed building and land to the client, with anticipated lease payments exceeding $1 million.

The gains tax's "mere change of identity or form of ownership" exemption (former § 1443.5) can shelter certain construction-financing arrangements where legal title moves but beneficial ownership doesn't really change. The Department explained the factors that can support treating such a project as exempt: (1) the developer entered a construction/rehabilitation agreement with the property owner; (2) the property was transferred to the developer SOLELY to facilitate financing for the project; and (3) the price the owner paid to get the property back didn't include any amount reflecting appreciation during the developer's temporary holding period. When all three hold true and the facts clearly show no real change in beneficial ownership, the developer isn't treated as ever having "owned," and therefore never "transferred," the beneficial interest.

But the Department stopped short of applying that test to Deegan's actual facts. Whether Deegan's client would be transferring the parcel back to Deegan solely to facilitate construction financing -- genuinely triggering the mere-change exemption -- is a FACTUAL question that an Advisory Opinion cannot resolve; by law (Tax Law § 171(24)), an Advisory Opinion can only apply the law to "a specified set of facts," not make factual findings about intent or substance. The Department also flagged its separate anti-avoidance authority (former § 1448.1): if the Commissioner finds that a transfer was structured PRIMARILY to avoid or evade the gains tax rather than for an adequate business purpose, the Commissioner can simply disregard the structure and tax the transfer anyway -- and whether that applied to Deegan's turnkey arrangement was, again, a factual question outside the scope of the opinion.

What this means for you

Developers structuring turnkey construction-financing deals with an owner-client

Under this now-repealed tax, a sell-and-buy-back-during-construction structure COULD qualify for the mere-change-of-identity exemption -- but getting an Advisory Opinion blessing it in advance wasn't possible if the exemption turned on disputed or unverified facts (like whether the "repurchase" price genuinely excluded appreciation, or whether the deal had an adequate independent business purpose). Be prepared to substantiate those facts yourself; the Department won't pre-certify them.

Real estate and tax attorneys drafting turnkey/synthetic construction financing arrangements

This opinion is a useful checklist of the three factors the Department looks to for the construction-financing mere-change exemption, and a reminder that the anti-avoidance rule in former § 1448.1 (Commissioner may disregard a transfer formulated primarily to avoid the tax) sits alongside the exemption as an independent risk -- documenting a genuine business purpose for the intermediate transfers matters.

Anyone requesting an Advisory Opinion on a structured, fact-dependent transaction

This ruling illustrates a real limit on what an Advisory Opinion can do: it applies law to a GIVEN set of facts, but can't resolve disputed factual questions (like true intent, or whether a repurchase price reflects appreciation) for you. If your exemption depends on facts that aren't yet certain or documented, expect the Department to decline a definitive answer, as it did here.

Common questions

Q: Does the mere-change exemption for construction-financing arrangements still exist today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. Other current NY taxes on real property transfers have their own separate exemption structures.

Q: What three factors did the Department say could support the exemption for a construction-financing transfer?
A: (1) a construction/rehabilitation agreement between the developer and the property owner; (2) the property was transferred to the developer solely to facilitate financing for the project; and (3) the price paid by the owner to reacquire the property didn't include any amount for appreciation during the developer's holding period.

Q: Why wouldn't the Department just say yes or no to Deegan's proposed structure?
A: Because an Advisory Opinion, by statute, can only apply the law to a "specified set of facts" -- it can't make the underlying factual determination (here, whether the repurchase was genuinely just for financing purposes, with no real change in beneficial ownership) that the exemption depends on.

Q: What is the anti-avoidance rule the Department mentioned?
A: Former Tax Law § 1448.1 let the Commissioner treat a transfer (and related transfers) as taxable if it found the transfer was structured primarily to avoid or evade the gains tax, rather than for an adequate independent business purpose -- an override that could apply even to a structure that otherwise looked exempt on paper.

Q: Can Deegan or another developer rely on this ruling for a similar deal today?
A: No, apart from the repeal -- this opinion didn't even resolve the outcome for Deegan's own facts, let alone bind the Department for any other taxpayer or structure.

Citations and references

Statutes:

• former Tax Law § 1441 (imposition of the gains tax at 10% of gain, for transfers with consideration of $1 million or more)
• former Tax Law § 1443.1 (the $1 million exemption)
• former Tax Law § 1443.5 (exemption for a transfer that is a mere change of identity or form of ownership or organization, with no change in beneficial interest)
• former Tax Law § 1448.1 (Commissioner's authority to disregard, and treat as taxable, a transfer formulated primarily to avoid or evade the gains tax rather than for an adequate business purpose)
• Tax Law § 171(24) and former 20 NYCRR § 2371.1(a) (an Advisory Opinion applies the law to a specified set of facts and cannot resolve disputed factual questions)

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_20r.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-93 (20) R
Real Property
Transfer Gains Tax
December 3, 1993

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M930826C

On August 26, 1993, as Petition for Advisory Opinion was received from Deegan
Development Group, Inc., PO Box 4090, 112 North Front Street, Kingston, New York 12401.
The issue raised by Petitioner, Deegan Development Group, Inc., is whether the sale or lease
of the building Petitioner is constructing for its client will be subject to the Real Property Transfer
Gains Tax (hereinafter the "gains tax") upon the completion of a turnkey contract.
Petitioner owns a parcel of land on which it's client wants Petitioner to construct a building
for them. The parcel of land represents a portion of the overall land it purchased three years ago.
It is proposed that Petitioner will sell the parcel of land it now owns to it's client for the
original cost Petitioner paid to purchase the parcel three years ago. Subsequently, Petitioner will
repurchase the parcel of land for the same price. Next, Petitioner will construct a building on the
parcel of land and upon completion sell the building and land back to the client.
As an alternative, it is proposed that Petitioner will sell and reacquire the parcel of land for
the original cost it paid to purchase the parcel three years ago. Next, Petitioner will construct a
building on the parcel of land and upon completion of the building, lease the land and building to
it's client. The value of the lease payments are anticipated to be in excess of one million dollars.
Pursuant to Sections 1441 and 1443.1 of the Tax Law and Section 590.1 of the Gains Tax
Regulations the gains tax is a ten percent tax on the gain derived from the transfer of real property,
which includes the acquisition or transfer of a controlling interest in any entity with an interest in real
property, where the property is located in New York State and where the consideration for the
transfer is one million dollars or more.
Section 1443.5 of the Tax Law provides, in pertinent part, as follows:
A total or partial exemption shall be allowed in the following cases:
*

*

*

5.
If a transfer of real property, however effected, consists of a mere change of identity
or form of ownership or organization, where there is no change in beneficial interest.

TP-9 (9/88)

-2­
TSB-A-93 (20) R
Real Property
Transfer Gains Tax
December 3, 1993
Section 1448.1 of the Tax Law provides, in pertinent part, as follows:
The commissioner of taxation and finance shall administer and enforce the tax
imposed by this article and is authorized to make such rules and regulations, and to
require such facts and information to be reported, as the commissioner may deem
necessary to enforce the provisions of this article.
Where such commissioner finds
that the transfer of any real property or an interest therein has been formulated that
the primary purpose of such formulation is the avoidance or evasion of the tax
imposed by this article, rather than for an adequate business purpose, the
commissioner shall treat such transfer as subject to the tax imposed by this article...
(emphasis added)
Some construction/rehabilitation projects are not subject to gains tax. While it is difficult to
generalize about certain unique factual situations, such projects are exempt from the gains tax where
although there is a transfer of legal title, the beneficial interest remains unchanged. Such projects
may be exempt from gains tax when the following factors have been demonstrated:
1.

the developer entered into a construction/rehabilitation agreement with the
owner of the real property,

2.

the real property was transferred by the owner to the developer solely for the
purpose of facilitating the financing for the construction/rehabilitation
project, and

3.

the consideration paid by the owner to the developer for there conveyance did
not include an amount representing the appreciation of the real property for
the period the developer held title.

Thus, when an owner of real property transfers his property to a developer solely for
the purpose of facilitating the financing for a construction/rehabilitation project for the
benefit of the owner and the developer is obligated, upon completion of the project, to
transfer the real property back to the owner and all of the facts clearly demonstrate that there
was no change in the beneficial ownership of the real property, then the developer will not
be viewed as having owned (or, therefore, as having transferred) the beneficial interest in the
property.
A determination in the instant case as to whether Petitioner's client will be
transferring the parcel back to Petitioner solely for the purpose of facilitating the financing
for the construction/rehabilitation project and, thus, effectuating a mere change of identity
pursuant to Section 1443.5 of the Tax Law is a factual question which cannot be determined
in an Advisory Opinion. An Advisory Opinion merely sets forth the applicability of pertinent
statutory and regulatory provisions to a "specified set of facts." Tax Law, Section 171, subd.
twenty-fourth; 20 NYCRR 23716.1(a).

-3­
TSB-A-93 (20) R
Real Property
Transfer Gains Tax
December 3, 1993
It is further noted that pursuant to Section 1448.1 of the Tax Law, if the initial
transfer by Petitioner to it's client of the vacant parcel is being formulated for the primary
purpose of avoiding or evading the gains tax, rather than for an adequate business purpose,
the Commissioner of Taxation and Finance will treat such transfer and the subsequent related
transfers between Petitioner and its client as subject to the gains tax. Whether Petitioner is
structuring the transaction in such a manner as to avoid or evade the gains tax is also a
factual question which cannot be determined within the context of an Advisory Opinion. Tax
Law, Section 171, subd. twenty-fourth; 20 NYCRR 23716.1(a).

DATED: December 3, 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.