Avoiding Transfer Tax Penalties for REOs

When real estate is sold in New York State, the seller must pay a “transfer tax.” If the property is located in New York City, or other municipalities that impose transfer taxes of their own, an additional transfer tax must be paid to the municipality as well.  

In the same way an individual completes a 1040 to determine his/her income tax liability, sellers complete Form TP-584 to determine their tax liability resulting from the sale of their property, and calculate the amount due. This form must be completed and submitted to the local County Clerk’s Office with a check for the amount of the tax due at the time the deed transferring the property is submitted for recordation.

Thesetransfer taxes must be paid within 30 days from the date of the conveyance, however, until recently, there was little scrutiny given as to the exact date that payment was issued, as long as payment was made.

This has changed. New York State, as well as many municipalities, have started scrutinizing the date the deed was executed and calculating the number of days between that date and the date the transfer tax was received. If the difference between those dates exceeds the thirty (30) days permitted, penalties are now being assessed! The penalties in different municipalities vary, but New York State imposes a standard late penalty of 10% of the amount of tax due plus interest of 2% for each month of delay.

While this may not be a problem in a typical real estate sale, as the deed is usually immediately given to the title closer along with the payment of transfer taxes at the closing, a foreclosure sale resulting in the Plaintiff taking title (commonly referred to as Real Estate Owned [REO]), results in a far different scenario.

After the foreclosure sale, Plaintiff’s attorney will complete Form TP-584, calculate the amount due and invoice their client for the funds required. Since many law firms wait until they receive these funds before recording the deed (and paying the transfer taxes), substantial penalties may result from the delay. Rather than debate whether the delay was caused by the law firm’s failure to invoice promptly or the client’s delay in payment, all parties would be better served by avoiding the delay and imposition of penalties altogether. This can be done by ensuring that the law firm expedites its billing to the client, and that the client expedites its payment to the law firm.

The moral? Work together, or pay the piper (in this case, the government)!