When recording a deed, New Jersey imposes two types of taxes: the realty transfer fee and, occasionally, the mansion tax. The realty transfer fee applies to all direct transfers of real property. The mansion tax is only applied when real property is purchased for more than $1 million.
1. Realty Transfer Fee
Usually, the seller of the real property is responsible for the realty transfer fee. However, the parties may negotiate who pays the transfer fee as long as the transfer tax is paid at the time the deed is recorded. Regardless of who pays the transfer tax, the seller is always liable for any underpaid or additional fee that is determined after the deed is recorded.
The transfer tax is calculated based on the total consideration for the conveyance. Total consideration includes the purchase price, outstanding mortgages, liens, and other encumbrances (if any) that are transferred or assumed as part of the conveyance. If consideration for the conveyance is greater than $350,000, then higher rates apply. If a lease is for 99 years or more, then the consideration is the assessed value of the property as of the date of the lease. To confirm the amount of the transfer fee, the true consideration must appear in the deed. True consideration can also be located with the deed in the acknowledgment or an attached affidavit of consideration.
In certain situations, the obligation to pay transfer tax is exempt. Exemptions are provided for a deed if:
- Consideration is less than $100.00.
- It is by or to the US, New Jersey or any of their agencies or subdivisions.
- Solely to provide or release security for a debt or obligation, like a mortgage.
- Correcting or confirming a previously recorded deed.
- On a sale for delinquent taxes or assessments.
- Filed as part of a partition.
- By a receiver, trustee in bankruptcy or liquidation, or assignee for the benefit of creditors.
- Eligible to be recorded as an ancient deed.
- Acknowledged or proved on or before July 3, 1968.
- Between a husband and wife or between a parent and child.
- Conveying a cemetery lot or plot.
- Conveyed in specific performance of a final judgment.
- Releasing a right of reversion.
- Previously recorded in another country which the transfer tax has already been paid.
- From the representative of an estate to an heir according to the decedent’s will or New Jersey intestacy laws.
- Recorded within 90 days after the entry of a divorce decree dissolving the marriage between the grantor and grantee.
- Issued by a cooperative to a shareholder as part of the cooperative’s conversion to a condominium form of ownership.
- For a transfer of real property entered into on or after January 1, 2021, that is an intercompany transfer between combined group members as part of a unitary business.
The realty transfer fee is reduced for either transfers involving the sale of one- or two-family dwellings owned and occupied by a senior citizen, blind or disabled person or low- and moderate-income housing. If the conveyance qualifies for a partial exemption, then the state will waive about one half of the realty transfer fee. These partial exemptions only apply to the individual, therefore if an elderly individual conveys the property through their estate, the beneficiary will not be allowed to take advantage of the reduced fee.
2. Purchaser Transfer Fee – Mansion Tax
If a property’s consideration is more than $1 million, the purchaser will be subject to the purchaser transfer fee, otherwise known as the mansion tax. Properties that are subject to the mansion tax are residential property, farm property, cooperative units, and commercial property.
The mansion tax rate applied is 1% of the consideration reflected in the deed and is required to be paid by the purchaser at the time of recording. If the conveyance is subject to the mansion tax, then the purchaser must attach an affidavit of consideration for use by the buyer to the deed. The seller must also attach their own affidavit of consideration. The mansion tax does not apply to conveyances to a nonprofit organization or to corporate mergers or acquisitions where the equalized value of the transferred real property is less than 20% of the total value of all assets exchanged in the merger or acquisition.
Other Transfer Taxes
1. Controlling Interest Tax
If a transaction involves the sale or transfer of a controlling interest in an entity that owns certain real property, the controlling interest transfer tax may apply. The controlling interest transfer tax is imposed at a 1% rate on a transfer of a controlling interest in an entity that owns a direct or indirect controlling interest in a commercial property. This tax is imposed when a transfer exceeds $1 million. When selling a controlling interest in the entity, the tax is assessed against the portion of the property’s equalized assessed value proportional to the percentage of the total transferred ownership interest.
The controlling interest tax does not apply to:
- transfers by or to the US, New Jersey or any of their agencies or subdivisions;
- 501(c)(3) charitable organizations;
- transfers subject to the mansion tax;
- corporate merger or acquisitions where the value of the real property is less than 20% of the total value of all assets exchanged in the merge or acquisition; and
- intercompany transfers between combined group members as part of a unitary business.
2. Bulk Sales Tax
Bulk sales law allows the state to collect capital gains and other outstanding tax liabilities of the seller from a ready source of funds. Bulk sales tax only applies to sales, transfers or assignments, or a company or an individual’s business assets. Bulk sales law does not apply to the sale of a one to two family residential dwelling or a seasonal rental unit.
3. Nonresident Gross Income Tax
Nonresident gross income tax is a tax where nonresidents estimate and prepay their state gross income tax liability on the potential gain from the sale or transfer of real property located in New Jersey. The estimated tax is calculated by multiplying the amount of the estimated gain from the sale of the property by the highest state gross income tax rate (10.75%). The minimum amount of the tax is 2% of the consideration for the sale regardless of any gain. A nonresident seller is exempt from paying estimated gross income tax if the property is used as the seller’s principal residence or the seller is a mortgagor and transfers the property to a mortgagee through a foreclosure or a deed in lieu of a foreclosure with no additional consideration.
It is important to be aware of what transfer taxes will affect your transaction in New Jersey. KI Legal’s Transactional attorneys are well versed in these matters and are prepared to help guide you through the process. For more information on New Jersey transfer taxes, or for help with your particular real estate venture at hand, contact us at (646) 766-8308 or email us to discuss.
*ATTORNEY ADVERTISING*
*PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME*
This information is the most up to date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team.
_____________________________________________________________________________________________
KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services generally fall under three broad-based practice group areas: Transactions, Litigation and General Counsel. Its extensive client base is primarily made up of real estate developers, managers, owners and operators, lending institutions, restaurant and hospitality groups, construction companies, investment funds, and asset management firms. KI Legal’s unwavering reputation for diligent and thoughtful representation has been established and sustained by its strong team of reputable attorneys and staff. For the latest updates, follow KI Legal on LinkedIn, Facebook, and Instagram. For more information, visit kilegal.com.