My family's real estate partnership is splitting up: I'm taking two of our five properties into a new entity with my spouse, and my siblings are taking the other three into their own entity. Does New York's Real Property Transfer Gains Tax apply, and does the value of the ownership interest I keep for myself get taxed as part of the deal?

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, generally exempt when consideration was under $1 million. It was repealed for any transfer occurring on or after June 15, 1996. This 1996 opinion is preserved here for historical and research value, not as current law.

L.N. and D. Shachnow's family partnership had three equal partners: two brothers (A and B) and C, the widow of a third brother who inherited his interest. The partnership owned five non-contiguous parcels of New York City real estate. The family decided to split up: parcels #1 and #2 would go to a new entity owned by brother A and his wife (90%/10%), while parcels #3, #4, and #5 would go to a separate new entity owned by brother B and widow C (50%/50% each). Because the parcels' appraised fair market values didn't perfectly match a 40/60 split by headcount, B and C agreed to pay A and his wife an additional $157,000 in cash to balance the deal.

The Department worked through three questions:

Look-through and full value as consideration. Before the split, each of the three original partners was treated as already owning a 33⅓% direct beneficial interest in EVERY one of the five parcels (the "look-through" principle from a prior Tax Appeals Tribunal case). Because the five parcels weren't contiguous or adjacent to each other, each parcel's transfer was analyzed separately (the aggregation rule under former § 1440.7(b) only combines contiguous/adjacent parcels transferred within 3 years). For gains-tax purposes, the consideration for each parcel was its full fair market value -- not simply the $157,000 cash actually paid to equalize the deal.

The mere-change exemption applied pro rata. Former Tax Law § 1443.5 exempted transfers that are merely a change in the identity or form of ownership, where there's no real change in beneficial interest. Since brother A already owned 33⅓% of parcels #1 and #2 before the split, his transfer of those parcels to his new entity was exempt to that same 33⅓% extent -- he wasn't "acquiring" anything new as to his own pre-existing share, just changing the form in which he held it. The same logic exempted 66⅔% of the gain on parcels #3, #4, and #5 (B's and C's combined pre-existing interest, now held through their new joint entity).

The remaining, newly-acquired share stayed subject to ordinary analysis. The mere-change exemption only covers the portion of a transfer that reflects a partner's OWN pre-existing beneficial interest. The rest of each transfer -- the share each partner was newly acquiring from the others -- was still measured under the regular $1 million exemption and gain calculation rules under 20 NYCRR § 590.51(c), which applies the $1 million exemption to consideration FIRST and the mere-change exemption SECOND.

What this means for you

Families and partners splitting up jointly owned real estate

Dividing up jointly held property among family members or business partners, even when it's really "everyone just keeps their fair share," is not automatically a tax-free reshuffling. Under this now-repealed regime, the portion of the deal that matched what you already owned was treated differently from the portion where you were effectively buying out someone else's share -- and the full fair market value of the property, not just cash paid to balance the deal, was the measuring stick.

Accountants and estate planners handling old partnership real estate splits

If you're untangling the gains-tax history of a pre-June-1996 family partnership breakup, this opinion is a clear worked example of layering the look-through doctrine, the contiguous-parcel aggregation test, the mere-change exemption, and the $1 million exemption together on the same set of facts.

Common questions

Q: Does the Real Property Transfer Gains Tax still apply to family partnership splits today?
A: No. It was repealed for transfers on or after June 15, 1996. Other New York taxes -- like the Real Estate Transfer Tax -- may still apply to similar transactions today, but this specific gains tax does not.

Q: If I already effectively own a share of jointly-held property, does moving it into my own entity trigger tax on my own share?
A: Under this now-repealed rule, no -- the mere-change-of-identity exemption covered the portion of a transfer matching a partner's own pre-existing beneficial ownership share, on the theory that nothing of substance changed as to that share.

Q: Why was full fair market value used instead of the cash actually paid?
A: Because for gains-tax purposes, consideration for each parcel was its full fair market value, including the value represented by the ownership interests exchanged -- not just any cash used to true up the difference between what each side was giving up and receiving.

Q: Could a similar family transaction rely on this exact ruling?
A: No, even apart from the repeal -- an Advisory Opinion binds the Department only as to the petitioners and facts described. A deal with different ownership percentages, contiguous parcels, or a different equalization structure could come out differently.

Citations and references

Statutes and regulations:

• former Tax Law § 1441 (imposition of the gains tax at 10% of gain from real property transfers)
• former Tax Law § 1440.7(b) (aggregation of successive transfers of contiguous or adjacent parcels by related transferors within 3 years)
• former Tax Law § 1443.1 (the $1 million exemption)
• former Tax Law § 1443.5 (exemption for transfers that are a mere change of identity or form of ownership, with no change in beneficial interest)
• former 20 NYCRR § 590.51(c) (the $1 million exemption applies to consideration first, then the mere-change exemption applies to the remaining gain)
• Chapter 309, Laws of 1996 (repealed the gains tax for transfers occurring on or after June 15, 1996)

Prior opinions/decisions cited:

• Matter of 307 McKibbon Street Realty Corp., Dec Tax App Trib, October 14, 1988, TSB-D-89(9)-R (the "look through" principle -- ownership of real property through an entity is equated with direct/beneficial ownership)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a96_8r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (8) R
Real Property
Transfer Gains Tax
June 27, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M960328A

On March 28, 1996, the Department of Taxation and Finance received a Petition for Advisory
Opinion from L.N. Shachnow and D. Shachnow, 616 East Palisades Avenue, Englewood Cliffs, New
Jersey. Petitioner, L.N. Shachnow and D. Shachnow submitted additional information pertaining to
the Petition on April 19, 1996 and April 25, 1996.
The issues raised by Petitioner, L.N . Shachnow and D. Shachnow, are how the aggregation
rules, the exemption for transfers which consist of mere change of identity or form of ownership and
the determination of whether the consideration is less than $1 million for purposes of the Real
Property Transfer Gains Tax imposed by Article 31-B of the Tax Law would apply based on the
following facts.
Petitioner is a New York general partnership (the "existing partnership") which has three
equal partners, A, B, and C (the original partners). A and B are brothers, and C is the widow of the
third brother who received her interest from his estate. Among the assets owned by the partnership
are five parcels of real estate located in New York City.
The Petitioner proposes to transfer the ownership interest of two parcels (parcels #1 and #2)
to a new partnership or a limited liability company which will be owned by A and A's wife. A will
own 90% of the new entity and A's wife will own 10%. The ownership interest of the three other
parcels (parcels #3, #4 and #5) will be transferred to another new partnership or a limited liability
company which will be owned by B and C. B and C will each own 50% of the new entity.
The five parcels are neither contiguous nor adjacent to each other. The fair market value, the
amount of the mortgage lien and original purchase price of each parcel is as follows.
Parcel #

1

2

3

4

5

Fair market value
$1,305,000.00
1,185,000.00
975,000.00
1,080,000.00
1,270,500.00

Mortgage lien
$ 729,000.00
929,000.00
652,000.00
-0­
823,500.00

Original purchase price
$850,000.00
760,000.00
698,000.00
675,000.00
1,012,000.00

In connection with the proposed transfers, B and C will pay A and A's wife $157,000 in
addition to transferring their beneficial interest in parcels #1 and #2 to the new partnership or limited
liability company to be formed by A and A's wife. This amount represents the differential in the
value of the properties transferred based upon the existing partners' estimate based on location,
building conditions, etc., independent of the fair market values mentioned above which were based
upon earlier outside appraisals.

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TSB-A-96 (8) R
Real Property
Transfer Gains Tax
June 27, 1996
Applicable Law and Regulations
Section 1441 of the Tax Law imposes the gains tax on gains derived from the transfer of real
property within the state at the rate of ten percent of the gain.
Section 1440.7(b) of the Tax Law provides as follows:
"Transfer of real property" shall include: (i) partial or successive transfers of interests
in contiguous or adjacent real property by a transferor or related transferors to one or
more transferees, if such transfers occur within a three-year period, without regard
to the use of such real property or whether such transfers were pursuant to a plan or
agreement;.
Section 1443.1 of the Tax Law sets forth that a transfer for consideration of less than one
million dollars is exempt from the gains tax (the $1 million exemption).
Section 1443.5 of the Tax Law provides an exemption from the gains tax to the extent that
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 (the mere change
exemption).
Section 590.51(c) of the gains tax regulations (Part 590 of 20 NYCRR) in describing the
interrelationship between the application of the $1 million and mere change exemptions sets forth
as follows:
The million-dollar exemption is applied to consideration first and then the mere
change exemption is applied. A transfer in which the consideration is greater than $1
million will remain taxable, the mere change exemption only defers payment of tax
on the portion of gain determined to be attributed to a mere change in form of
ownership.
In Matter of 307 McKibbon Street Realty Corp., Dec Tax App Trib, October 14, 1988, TSBD-89(9)-R, the Tax Appeals Tribunal, in describing the "look through" principle of the gains tax and
the ownership of entities with an interest in real property, stated that the imposition of the tax
"...expresses the theory of the tax to look down through entities and to equate ownership of real
property through an entity, beneficial ownership, with direct ownership of real property. ... "
Analysis and Conclusion
Immediately prior to the transfers by Petitioner, each of the original partners is considered
to have a 33 1/3 percent beneficial ownership in each of the five parcels through their ownership
interest in the Petitioner in accordance with 307 McKibbon Street Realty Corp., supra. Therefore,
the transfers by the Petitioner are deemed to be transfers by the original partners to the extent of the

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TSB-A-96 (8) R
Real Property
Transfer Gains Tax
June 27, 1996
beneficial ownership in each of the five parcels that is given up in exchange for consideration in the
form of the ownership interest in the respective parcels that each partner receives.
Since each of the parcels is neither contiguous nor adjacent to any other of the parcels, each
transfer would be considered a separate transfer of real property based on the provisions of Section
1440.7(b) of the Tax Law. The consideration for each transfer by the Petitioner is deemed to be the
full fair market value of each parcel. The fair market value of parcels #3, #4 and #5 must be
determined with reference to the $157,000 that is paid to A and A's wife. This is so because this
amount is being paid based on the original partners' agreement that the earlier outside appraisals did
not reflect the true fair market value of some or all of parcels #3, #4 and #5.
Regarding the mere change identity exemption, the transfers by Petitioner of parcels #1 and

2 to A and A's wife would be exempt to the extent of 33 1/3 percent of the gain, representing A's

beneficial ownership interest in the parcels immediately prior to the transfers. Similarly, the transfer
by Petitioner of parcels #3, #4 and #5 would be exempt to extent of 66 2/3 percent of the gain
representing B's and C's aggregate beneficial ownership interest in the parcels immediately prior to
the transfers.

DATED: June 27, 1996

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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