Whenever you buy or sell real property, you need to be aware of the potential tax consequences. How a sale is structured determines how much tax you owe. If you realize after the sale is complete that something is amiss, it may be too late to do anything about it.
A Recent Example
Here is a case in point. In 2011, a Long Island funeral director decided to sell her business to two of her longtime employees. The business included a 6,160 square-foot building in the Flushing neighborhood of Queens.
Initially, the parties agreed to structure the transaction as a single stock sale. That is, the owner would sell 100% of the shares in the corporation, which owned the real property and other business assets. The parties signed a written agreement setting a purchase price of $2.8 million.
However, the buyers later claimed they were unable to obtain financing for the purchase unless the sale of the real property was separated from the sale of the rest of the business. The owner's attorney, acting under a power of attorney previously signed by the owner, agreed to separate the transactions. Accordingly, the attorney and the buyers signed two new contracts—one selling the stock in the funeral business for $900,000, and the second selling the Queens property for $1.9 million.
The parties closed the sale in August 2011 with the owner present. A short time later, the now-former owner's accountant informed her that because the deals had been separated, her tax liability was $830,000 more than originally anticipated. Additionally, she learned the Appellate Division, Second Department, suspended her attorney from the practice of law nearly a year earlier.
Based on this new information, the woman sued the buyers and her former attorney in Nassau County Supreme Court, seeking to rescind the transfer of title to the Queens property. The defendants argued the lawsuit was improper because all of the relevant contracts contained provisions requiring arbitration of any disputes. The plaintiff argued the arbitration clauses were not binding since the underlying contracts were obtained through fraud—that is, she never authorized her attorney to negotiate the separate agreements.
The Supreme Court denied the plaintiff's motion to stay arbitration, however, and a divided panel of the Second Department affirmed in an August 19decision. The majority noted that even the original, single-sale contract contained an “identical” arbitration clause to the separated agreements challenged here. More to the point, the plaintiff personally appeared at the closing of the separate contracts. She was therefore “presumed to have read the closing documents” and “conclusively bound” by its terms. And notwithstanding her attorney's suspension, she did, in fact, execute a legally binding power of attorney authorizing him to negotiate contracts on her behalf.
One judge dissented from the majority, arguing the plaintiff presented sufficient evidence to warrant a trial on her fraud claims. In particular, the dissenting judge noted the closing documents signed by the plaintiff made no mention of the higher tax liability due to the restructuring of the sale.
Need Help Buying or Selling Real Property?The dissenting judge's arguments notwithstanding, the lesson here is fairly straightforward. You should never close on a real property sale without taking time to understand all of the potential tax and legal consequences. Especially when dealing with commercial real property that exists as part of a larger business, it is imperative you receive professional advice from an experienced New York real estate attorney. Contact our offices today if you need help with any real property matter.