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Timing of Move to NY Proves Costly for CT Homeowner

Suppose you land a new job in New York City. At the time, you live in Connecticut and don’t want to make the commute, so you put the home on the market. You find a willing buyer, and then attend the closing and sign all papers you believe are necessary for the closing.

Four days later, you close on the purchase of a condo in New York City and move into it immediately. You start your new job the next day.

Later that same month, your attorney handling the sale of the CT home obtains a check from the purchaser for the balance due on the sale.

The question: Is the gain on the sale of the CT home subject to NYS and NYC income tax?

For taxpayer Glenna Michaels, the answer is yes, according to a recent decision by the NYS Division of Tax Appeals. As a result, she owes NYS $811,735 in tax, plus $144,343.54 in interest, which continues to accrue.

The home in question sat at 245 Byram Shore Road in Greenwich, Connecticut. The buyer was Bonnie Tisch, who is the daugther-in-law of billionaire Wilma Tisch.

The issue in the case was the timing of the accrual of the taxpayer’s $11.6 million gain on the sale of her CT home. If the accrual occurred before she moved to NYS and established residency there, then CT would be the only state to tax the income. If, however, the accrual took place after the move to NYC, then NYS and NYC would also have the right to tax the income.

The outcome is significant. In 2004, the year of sale, the highest NYS & NYC combined individual income tax rate was 12.15%, and the highest CT income tax rate was 5%.

NY Tax Law says when an individual changes resident status during a taxable year, apply the Internal Revenue Code to determine the accrual of a capital gain. Under the IRC, a closed and completed sale triggers accrual of income. Transfer of ownership is completed upon title passage or passage of benefits and burdens of ownership. Passage of such items are determined by state law, so we go back to NY law, which says a grant of real property takes place only from delivery of a valid deed by grantor to grantee.

So why did the taxpayer lose? I haven’t yet mentioned section 10 of the sales contract, entitled “RISK OF LOSS”:

[P]etitioner assumed “[t]he risk of loss by fire of other casualty to the buildings on said premises until the time of the delivery of the deed.” In the event that such fire or casualty occurred, petitioner would have been provided 30 days to “repair or replace such loss or damage” or, in the event that petitioner failed to do so, the purchaser would be given the option of terminating the agreement or accepting the deed upon payment of the purchase price and receiving the benefit of all insurance moneys recovered, less actual expenditures on repairs.

Petitioner is the taxpayer. The taxpayer retained the risk of loss until transfer of title took place. Only until after the delivery of the deed would the risk of loss shift over to the purchaser, at which point there would be a completed transaction for tax purposes.

But the taxpayer executed the deed before buying and moving into her new NYC condo. Doesn’t that complete delivery of the deed?

Not in this case.

The deed, a mortgage deed, was to be held in escrow pending the taxpayer’s full performance under the sales contract. Performance of the covenants, agreements, and provisions contained in the mortgage deed and the sales contract would only occur at closing when full payment was made on delivery of the deed to the purchaser.

The final payment on the CT home was made after the taxpayer moved into the NYC condo. As a result, NYS deemed the sale of the CT home as taxable income because the taxpayer was a NYS resident then the sale was completed.

Timing can be critical when taxpayers change their state of residence. This case is a perfect example.

Case: In re Michaels, DTA No. 823370 (N.Y. Div. Tax App. Apr. 12, 2012).

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