Real estate transfer taxes (RETT) are a one-time tax or fee imposed by a state or local jurisdiction on the transfer of real property. Currently 17 states impose the tax under a variety of names (i.e., Recordation Tax, Stamp Tax, etc.)
The tax is typically levied when recording a deed or other legal document from buyer to seller but can also be imposed on a variety of other structured transactions, including leases. The party responsible for paying the tax differs by each jurisdiction.
Other names for Real Estate Transfer Taxes include:
- Deed transfer tax
- Real property transfer tax
- Realty transfer tax
- Recordation tax
- Documentary transfer tax
- Conveyance tax
- Stamp tax
Transfer Taxes on Leaseholds and Subleases
Transfer taxes contain many nuances that impact their applicability, tax base and computations. Many states and municipalities apply a RETT on the creation, surrender, and assignment of a lease. Some common triggers include:
- Length of lease
- Options for renewal and purchase
- Capital improvements to the property
- Sale of a controlling interest in entities that hold leasehold interests
Taxable Consideration
Taxable consideration is generally defined as the entire compensation paid or to be paid for the transfer of real property and can be determined in a variety of ways. As an example, New York consideration can be computed using the present value of the right to receive rental payments or other payments attributable to the use and occupancy of the real property, plus the present value of rental or other payments attributable to any renewal term.
Operating costs and expenses to 3rd parties, including heat, gas, electricity, furnishings, insurance, maintenance, management, and real estate taxes can be taken into account when:
Surrender of lease
Generally, the consideration for the surrender of a leasehold interest is the amount paid for the surrender by the lessor to the lessee. Consideration does not include the value of the remaining rental payments that are required in accordance with the terms of the lease.
No tax will be imposed on the surrender of a leasehold interest if the lessee pays consideration to the lessor to accept the surrender.
Assignment of lease
The consideration for the assignment of a lease is the amount paid for the assignment by the assignee to the assignor. Meaning, the lessee under the lease or the person who is assigning his or her rights to purchase the property under the option or contract. Consideration does not include the value of the remaining rental payments that are required pursuant to the terms of the lease.