The Application of the New Jersey Realty Transfer Fee to Transactions Between Related Entities

In New Jersey, a realty transfer fee (“RTF”) is imposed on the sale of real property and is payable when the deed is recorded. The RTF, which is paid by the grantor, is calculated by applying specific tax rates to the “consideration” paid. Pursuant to N.J.S.A 46:15-10(a), a sale is exempted from the RTF if the “consideration” paid is less than $100. Until August 1, 2006, an entity could transfer ownership of real property to its wholly-owned entity and avoid paying the RTF by listing the deed consideration as some nominal amount less than $100. In 2006, the Division of Taxation adopted a regulation that changed the definition of “consideration” to eliminate the possibility of entities utilizing the exemption for transfers of real property to wholly-owned entities. However, based on a recent Tax Court opinion, entities may now be able to transfer title to wholly-owned entities for nominal consideration without paying the RTF.

Until the adoption of N.J.A.C. 18:16-6.1, conveyances between related entities for nominal consideration did not usually trigger a requirement to pay the RTF. The reason for it is that the statute creating the RTF defined “consideration” as the actual amount of money paid and the monetary value of any other item of value included as part of the entire purchase price for the property. If the deed listed the consideration as some number less than $100.00, and did not include, for example, the transfer of ownership interests or the grantee’s assumption of the existing mortgage, then no RTF would be due at the time the deed was recorded.

All that changed on August 1, 2006, when N.J.A.C. 18:16-6.1 became effective. In this regulation, the Division of Taxation changed the definition of “consideration” as it pertained to the conveyance of real property from one entity to another entity with common ownership. Instead of defining “consideration” as the actual amount paid for the property, the regulation changed the definition to include the monetary value of stock transferred or contribution to capital by the grantor. In addition, if there was no transfer of stock or capital contribution, the regulation required the RTF to be calculated on the assessed value of the property being conveyed on the date of the transfer adjusted to reflect the property’s true value (as determined by the Director’s Ratio for the current year). Entities conveying real property to wholly-owned related entities for nominal consideration were now obligated to pay an RTF on the transfer. However, in a recent decision, the Tax Court rejected the application of the regulation as a blanket exclusion against an entity’s use of the RTF exemption in N.J.S.A. 46:15-10(a).

In Mack-Cali Realty, LP et al v. Clerk of Bergen County, Docket No. 000037-2008 (N.J. Super Tax 2009), a county clerk refused to record deeds from a limited partnership to limited liability companies in which it was the sole member, without receiving payment of the RTF. The Division of Taxation rejected the limited partnership’s claim that no RTF was required, finding that there can be no conveyance between legal entities for less than $100. The Division of Taxation argued that, in the case of the transfer of property ownership between commonly owned entities, there is always a benefit to the grantor. It also argued that if the benefit cannot be quantified, then the consideration should be based on the value of the property being transferred. In this case, the Division of Taxation argued that, in exchange for the real property, the grantor limited partnership received assets (the membership interests in the limited liability companies) whose value appreciated in an amount to the value of the properties transferred. Therefore, the grantor limited partnership was required to pay an RTF on the value of the property conveyed.

The grantor limited partnership argued that the Division of Taxation’s claim that no transfer between commonly owned entities can be made for nominal consideration was contrary to, and inconsistent with, the statutory definition of “consideration.” The Tax Court found that the definition of “consideration” in the statute, is stated in terms of the actual amount of money and monetary value of other items constituting the entire consideration that is paid or to be paid for the property. The statute lists the direct benefits received by a grantor that would be subject to the RTF. It also includes the principal balance of any mortgage being assumed by the grantee. However, with the exception of the mortgage being assumed, the “consideration” subject to the RTF is only comprised of elements directly given by a grantor to a grantee as part of the exchange. The Tax Court found it improper to include, within the definition of “consideration” subject to the RTF, the indirect benefits imputed by the Division of Taxation.