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What impact Gains Tax reform?

As anticipated, changes in how the New York State Gains Tax is administered has not brought a flood of building sales, but, industry executives say, some stalled transfers, especially in the area of troubled properties where a lender is involved.

Last month, much to the credit of the Real Estate Board of New York, Governor Cuomo signed reforms that enable the 10 percent gains tax to be applied more closely to actual profits. In many sales, particularly in workout situations, there is no economic gain and there may even be a loss. was a much fairer way to initiate the tax," said Warren Wechsler, vice president, Real Estate Board of New York, which waged a three-year campaign for the revisions.

Under the new rules of the New York State Gains Tax:

* The original purchase price can now include "soft costs" of advertising and marketing expenses, mortgagerecording tax, interest on land during construction, and the amortized cost of 421-a certificates on unsold cooperative and condominium units

* "Consideration" on transfer of a troubled property to the lender may now derather than the face amount of the debt

* Lenders who take back a troubled property will not be liable for the debtor's gains tax liability arising from a sale

* Taxpayers who file on time, underpay, and submit the adjustment within 10 days of being notified will not be penalized unless the miscalculation was due to negligence or fraud

Industry members seemed to share the belief that these moves were necessary to, at least, quicken the pace of the healing process.

Who's going to pay the gains tax -- the borrower who doesn't have any the money or the lender who doesn't feel responsible, is a big issue stagnating many workouts and foreclosure sales, said Jeff Stavin, CPA, Friedman Alpren & Green.

"It makes the transaction a lot easier to accomplish," said Stavin.

The reforms were "long overdue especially in, bankruptcy," said Peter Hauspurg, principal, Eastern Consolidated Properties. According to Hauspurg, the changes will probably speed up sales that would have come out eventually. Cash, he said, remains a problem.

Leslie Himmel, principal, Himmel + Meringoff, owners of real estate, agrees there will not be a large increase in transfers until there is an improvement in liquidity. She believes banks and financial institutions should follow the "logic" of the state, which, she says, has opted to forfeit tax revenue for the good of the economy. The sooner troubled assets can be purchased from banks, she said, the sooner they will be back in the hands of the entrepreneurs who can "aggressively list and market" the real estate.

She also hopes New York City will follow suit and revise its prohibitive transfer tax.

In addition to helping sellers and lenders, the changes will have some overall economic benefits for New York.

According to Wechsler, a less onerous gains tax will encourage investment.

"It's a favorable signal that the government listens and that an investor's fate is not casually handled," he said.

When a building changes ownership, there is usually a plan of some proportion for upgrading the premises. That means contracts and jobs.

"There's a huge ripple effect by getting the property back into the private sector," Hauspurg said.

The Cuomo tax has always been a sore spot for the real estate industry. When the market took a nosedive in the late 80's, many owners became reluctant to bite the bullet and lower prices on their properties knowing because they would have to forfeit 10 percent of a profit that was far less than they projected.

"I think it will have a definite positive effect in that the Cuomo tax had become an excise tax instead of a gains tax,' said Himmel.

"This is a big step in the right direction," said Hauspurg.

Three of the administrative changes took effect with the adoption of Governor Cuomo's budget bill for Fiscal Year 1993-1994 on April 15. The penalties portion will become effective 150 days from them.

The state is in diffiuclt economic straint so they are extremely zealous at what taxes they can obtain
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Title Annotation:New York State Gains Tax
Author:Fitzgerald, Therese
Publication:Real Estate Weekly
Date:May 12, 1993
Previous Article:Council to vote on fate of J-51.
Next Article:Co-op deep freeze begins to thaw.

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