Good and Bad News for Non-residents owing New York Real Estate

By: Elizabeth A. Hartnett

The New York Department of Taxation has issued two new tax advisory opinions that have a significant impact on taxpayers who are non-residents of New York State.

We have previously posted information for non-residents.  See Ryan Emery’s posts of April 21, 2015 and March 19, 2014.  This blog reports on very recent developments based on two advisory opinions issued by the New York Department of Taxation on May 15, 2015.

First, the bad news. Real estate located in New York and owned by a non-resident in a single member limited liability company that is disregarded for income tax purposes will be subject to New York estate tax.

Many former New Yorkers move out of state to avoid New York estate taxes.  If New York tangible property such as real estate is owned by a non-resident then it remains subject to New York estate tax.  Intangible property (such as bank deposits, securities, mortgages) owned by a non-resident will not be taxed in New York.  To avoid New York estate tax, non-residents who owned real property in New York transformed the ownership of such tangible real property into nontaxable intangible property by transferring it to a single member limited liability company.  It was assumed that, since the membership interest in the LLC is intangible property, there would be no New York State estate taxation.   This assumption is no longer correct.

The New York advisory opinion states that estate taxation of a single member limited liability company membership interest is dependent on the election made by the owner to be taxed on the income of such LLC either as (i) a disregarded entity in the same manner as a sole proprietorship or (ii) a corporation.  When the LLC is disregarded for federal income tax purposes it is treated as owned by the individual owner and the real property is treated as held by the individual owner for New York State estate tax purposes.

What should a non-resident with such a single member LLC do?  Probably the best action to take is to transfer a small interest in the LLC to a family  member and elect to have the LLC treated as a partnership for income tax purposes.  A partnership is intangible property not subject to New York estate tax if owned by a non-resident.

The second advisory opinion issued the same date contains both good and bad news.  The news relates to the imposition of New York income taxation on non-residents. Generally, a non-resident of New York is subject to New York personal income tax on New York source income.  That includes income attributable to the ownership of real property in New York.  Where real property is owned by a subchapter S corporation (a “flow through” entity where the income is reported and taxed on the shareholder’s return) a special rule applies.  If certain valuation and ownership criteria are met a portion of the sale of corporate stock is deemed New York source income and subject to state personal income tax.   If the sale of stock is made under an installment payment agreement, a portion of each installment payment would be New York source income.

The good news here is that the interest on installment payment notes is not New York source interest and is not subject to New York income taxes.

Non-residents should review the potential taxation of their New York real estate holdings based on these recent opinions.

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