Client Alert
Contact:
Arnold D. Litt, Esq., Chairperson
Real Estate and Banking Law Group
Direct: 201-342-6000 Ext. 222
June 8, 2010

DEFERRAL OF GAIN FROM THE SALE OF COMMERCIAL REAL ESTATE PURSUANT TO SECTION 1031 OF THE INTERNAL REVENUE CODE, RESULTS IN THE DEFERRAL OF NEW JERSEY SALES AND USE TAX vUNDER N.J.S.A. 54:50-38

Dear Clients and Friends:

Previously in an issue of the Herten Burstein Insights and Developments in the Law1, I reviewed the then new provision of the expanded Tax Bulk Sale Notice Requirements Under Section 54:32B-22(c), created by N.J.S.A. 54:50-38, which was adopted on June 28, 2007, by then Governor Corzine. Specifically that provision expanded the Tax Bulk Sale Notice requirement and made it applicable to any transaction in which a seller makes a bulk sale, not just when a seller is required to collect and remit sales or use tax. We concluded that in connection with the sale of commercial real property, that just about any commercial property would trigger the Bulk Sale Notice requirements.

The question has been raised as to whether the deferral of gain from the sale of commercial real estate pursuant to Section 1031 of the Internal Revenue Code (the I.R.C.) [the so called "Section 1031 Tax Free Exchange Provision"], would have any affect on the bulk sales tax payment obligations of sellers, transferors or assignors, and the corresponding obligations of purchasers, transferees or assignees, to file an appropriate Notification of Sale with the Division of Taxation of New Jersey under N.J.S.A. 54:50-38.

At first blush, one could argue that deferral of federal tax gain would otherwise have no affect on New Jersey Sales Tax, since they are independent of each other. However, the "Asset Transfer Tax Declaration" [Form TTD] which must be completed and filed by the transferor (seller) with the New Jersey Division of Taxation, Line 6 thereof, specifically references "IRC Section 1031 Exchange (if applicable)". This deferred gain is subtracted from Line 1, which is the "Consideration/Purchase Price" and would therefor result in zero gain reported on Line 7 of Form TTD.

Although there will be no sales tax due in connection with the sale of commercial real estate where federal tax gain is deferred under the Section 1031 Tax Free Exchange Provision, nevertheless, Form C-9600 ["Notification of Sale, Transfer, or Assignment in Bulk"] is required to be filed in connection with the transaction.

For more information regarding this holding, please feel free to contact Arnold D. Litt, Esq., Chairperson Real Estate and Banking Law Department, at 201-342-6000 , or via e-mail at Alitt@hertenburstein.com. 

Note this Client Alert is not intended to provide legal advise on specific subjects, but rather to provide insight into legal developments and issues. The reader should always consult with legal counsel before taking action on matters covered in this Alert.

1  Herten Burstein Insights and Developments in the Law –
    Winter 2008/2009 (See Newsletters@hertenburstein.com)