On November 5, 2007, the New Jersey Division of Taxation proposed new rules implementing a change in law enacted on August 1, 2006. This little-known change, which essentially extends the real estate transfer tax to certain corporation transactions, was another small part in New Jersey's attempt to balance its budget. The result is to add another level of legal analysis that must be considered when contemplating corporate level transactions for entities that own real estate in New Jersey.
Essentially, the new law imposes a tax on the purchaser in a non-deed transfer of a controlling interest in an entity that owns classified real property if the total consideration for the transfer is in excess of $1million. The 1 percent is applied to dollar one for any applicable transactions.
"Classified real property" means commercial property that is income producing, other than vacant land, residential property, farm property, industrial properties or apartments designed for five or more families. The law is designed to tax any transfer of a controlling interest in an entity that owns such property.
There are two methods of calculating the tax. If the entity owns only classified real property, the tax is initially imposed if the consideration for the transfer is in excess of $1million for the controlling interest. The second method is used if a controlling interest is sold or transferred and the entity possesses, directly or indirectly, a controlling interest in classified real property and an interest in other property. Under the second method, the equalized assessed value of the classified property, not the amount of consideration paid for the controlling interest itself, is used in the calculation of tax.
The proposed regulations, which will be found at N.J.A.C. 18:16A-1.1 et. seq., go on to set forth various examples and additional rules. Transfers to tax exempt entities are exempt, as are certain other transfers that currently are exempt from the realty transfer fee. In addition, and this is significant, a transfer incidental to a corporate merger or acquisition is exempt if the equalized assessed value of the classified real property transferred is less than 20 percent of the value of all assets.
As indicated above, the rules apply to transfers of indirect or direct controlling interests, which can complicate matters, and result in the need for careful analysis, not unlike the New Jersey Industrial Site Remediation Act rules, on a case by case basis.
If you have any questions on the new regulations, please do not hesitate to contact us.