1402 - Imposition of tax.
§ 1402. Imposition of tax. (a) A tax is hereby imposed on each conveyance of real property or interest therein when the consideration exceeds five hundred dollars, at the rate of two dollars for each five hundred dollars or fractional part thereof; provided, however, that with respect to (A) a conveyance of a one, two or three-family house and an individual residential condominium unit, or interests therein; and (B) conveyances where the consideration is less than five hundred thousand dollars, the consideration for the interest conveyed shall exclude the value of any lien or encumbrance remaining thereon at the time of conveyance. (b) (1) Notwithstanding the provisions of subdivision (a) of this section, in the case of any real estate investment trust transfer occurring on or after the effective date of this subdivision, the tax imposed under subdivision (a) of this section shall be imposed at the rate of one dollar for each five hundred dollars or fractional part thereof of consideration. (2) (A) For purposes of this subdivision, the term "real estate investment trust" (hereinafter referred to as a "REIT") shall have the same meaning as in section 856 of the internal revenue code. (B) For purposes of this subdivision, the phrase "real estate investment trust transfer" shall mean any conveyance of real property or an interest therein to a REIT, or to a partnership or corporation in which a REIT owns a controlling interest immediately following the conveyance, which conveyance (I) occurs in connection with the initial formation of the REIT, provided that the conditions set forth in clauses (i) and (ii) of this subparagraph are satisfied, or (II) in the case of any real estate investment trust transfer occurring on or after July thirteenth, nineteen hundred ninety-six and before September first, two thousand eleven, is described in the last sentence of this subparagraph. (i) The value of the ownership interests in the REIT, or in a partnership or corporation in which the REIT owns a controlling interest, received by the grantor as consideration for such conveyance must be equal to an amount not less than forty percent of the value of the equity interest in the real property or interest therein conveyed by the grantor to the grantee and such ownership interests must be retained by the grantor or owners of the grantor for a period of not less than two years following the date of conveyance; provided, however, that in the case of the death of the grantor or an owner of the grantor within such two year period, this two year retention requirement shall be deemed to be satisfied notwithstanding any conveyance of such ownership interests held by such individual as a result of such death. The value of the equity interest in such real property or interest therein shall be computed by subtracting from the consideration for the conveyance (determined in accordance with paragraph three of this subdivision) the unpaid balance of any loans secured by mortgages or other encumbrances which are liens on the real property or interest therein immediately before the conveyance. For purposes of this computation, in the case of a conveyance of real property or interest therein other than a transfer or an acquisition of a controlling interest, the amount of the unpaid balance of any loans secured by mortgages or other encumbrances to be subtracted from consideration is determined by multiplying the total unpaid balance of any loans secured by mortgages or other encumbrances on the real property or interest therein by the percentage of the ownership interest in the real property or interest therein being conveyed to the grantee. In the case of a conveyance which is a transfer or an acquisition of a controlling interest, such amount to be subtracted is equal to the sum of the following amounts: (I) a reasonable apportionment to the interests in real property owned by theentity of the amount of any loans secured by encumbrances on the ownership interests in the entity which are being transferred or acquired and (II) the amount of any loans secured by mortgages or other encumbrances on the real property of the entity multiplied by the percentage interest in the entity which is being transferred or acquired. Provided, however that, for purposes of this computation, any mortgages or other encumbrances on the real property or interest therein which are created in contemplation of the initial formation of the REIT or in contemplation of the conveyance of such real property or interest therein to the REIT or to a partnership or corporation in which the REIT owns a controlling interest immediately following the conveyance shall not be considered. (ii) Seventy-five percent or more of the cash proceeds received by such REIT from the sale of ownership interests in such REIT upon its initial formation must be used: (I) to make payments on loans secured by any interest in real property (including an ownership interest in an entity owning real property) which is owned directly or indirectly by such REIT; (II) to pay for capital improvements to real property or any interest therein owned directly or indirectly by such REIT; (III) to pay costs, fees, and expenses (including brokerage fees and commissions, professional fees and payments to or on behalf of a tenant as an inducement to enter into a lease or sublease) incurred in connection with the creation of a leasehold or sublease pertaining to real property or any interest therein owned directly or indirectly by such REIT; (IV) to acquire any interest in real property (including an ownership interest in any entity owning real property), apart from any acquisition to which a reduced rate of tax is applicable pursuant to this subdivision (without regard to this clause); or (V) for reserves established for any of the purposes described in subclause (I), (II) or (III) of this clause. For purposes of this clause, the term real property shall include real property wherever located. If a conveyance otherwise described in this subparagraph occurs other than in connection with the initial formation of a REIT, the condition set forth in clause (ii) of this subparagraph shall be disregarded and such conveyance shall constitute a "real estate investment trust transfer" if the condition set forth in clause (i) of this subparagraph would be satisfied if "fifty percent" were substituted for "forty percent" therein. (3) For purposes of measuring consideration under this subdivision, the fair market value of the real property or interest therein being conveyed shall be calculated by dividing (i) the net cash flow from operations with respect to such real property for the twelve-month period ending on the last day of the second month preceding the date of the conveyance by (ii) the sum of (A) the federal long-term rate compounded semi-annually that is determined by the United States secretary of the treasury under section 1274(d) of the internal revenue code in effect thirty days prior to the date of the conveyance and (B) two percentage points. Provided however, if the commissioner of taxation and finance determines that either the amount in clause (i) of this paragraph or clause (ii) of this paragraph does not result in an accurate representation of the fair market value of such real property or interest therein as such value is to be determined under this paragraph, the commissioner may adjust either of such amounts. In lieu of utilizing the method prescribed in this paragraph for determining fair market value, the taxpayer may utilize any method for determining fair market value that the commissioner of taxation and finance has prescribed in rules or regulations or otherwise.