New Jersey §1031 Exchange Issues: The Bulk Sales Law and GIT-REP Requirements
By: James T. Walther, Esq., LL.M., General Counsel,
Legal 1031 Exchange Services, LLC
If you plan on conducting business transactions in the State of New Jersey, it is imperative to find out if a sale, transfer, or assignment of “business assets” is subject to the NJ Bulk Sales Act, which requires that the buyer withhold funds from the transaction for the seller’s estimated tax liability.
The Bulk Sales Act1 applies to many NJ real estate transactions. In addition, other withholding requirements may apply or overlap the NJ Bulk Sale laws.2 These withholding requirements are designed to prevent tax revenue from leaving New Jersey when an individual, trust, estate, or disregarded entity disposes of a major asset located in the state. This article will provide an overview of how the Bulk Sales withholding requirements and the Gross Income Tax Receipts “GIT-REP” withholding requirements affect an IRC §1031 Exchange (“1031 Exchange”).
THE NJ BULK SALES LAW
The Bulk Sales Law, N.J.S.A. 54:50-38, applies to the disposition in bulk of any part or all of a taxpayer’s “business assets” other than in the taxpayer’s ordinary course of business For example, the bulk sales law would not apply to a sale where a developer of housing communities sold of one of its many homes or a car dealer selling cars. These sales would be considered inventory sales.3 This law applies to many real estate transactions regardless of whether the real estate is titled in the name of a business entity or in an individual’s name. However, because a 1031 exchange defers NJ state tax on the gain from a real estate sale, it is crucial for the seller/exchanger and their tax/legal advisors to understand this process.
Step 1 - Buyer files Form C-9600: If the bulk sales law applies, the party taking title to the real estate is required to notify the New Jersey Division of Taxation (“DOT”). The purchaser, assignee, or transferee of real estate can satisfy this requirement by submitting a completed NJ Form C-96004 and a copy of the executed contract of sale, by certified, registered, overnight mail, UPS or FedEx, at least ten (10) business days prior to the proposed date for closing the transaction.5 There is no fee for filing the form. If the party taking title to the real estate fails to comply with the bulk sales notice requirement, the purchaser will be subject to liability for any NJ state tax obligations due by the seller at the time of closing including interest and penalties. Therefore, closings should not commence without a response from the Division of Taxation as this may put the purchaser at risk. However, “If the Division fails to respond to a bulk sale notification within ten (10) business days, the purchaser will not be liable for any State tax obligation of the seller.”6
Step 2 - Withholding Escrow: If Bulk Sales withholding is required, the New Jersey Division of Taxation will send a notice specifying the amount to be withheld from the sale proceeds for potential unpaid tax liabilities of the Seller.7 Once the amount required by the state is placed into escrow with the buyer’s attorney or closing agent at or prior to closing, the purchaser may proceed with the closing without liability for deficiencies in the seller’s tax payments beyond the escrow.
Subsequent steps – Reducing the Escrow amount
TTD Form: To assist the Division of Taxation in assessing the estimated withholding, the transferor should promptly file an Asset Transfer Tax Declaration (Form TTD), after the C-9600 is filed. This step is crucial in properly structuring a full tax deferral in a 1031 exchange. The TTD provides the Division of Taxation with an estimated tax calculation for the gain from the sale. The TTD Form is often filed after closing but could be provided to the buyer and filed simultaneously with the C-9600, usually after an estimated settlement statement has been prepared. Taxpayers should direct the form to their assigned caseworker, the contact information for which is on the bottom of the withholding notice/letter. Per the instructions to the TTD form: “Upon completion of this declaration, submission to and review by the Division, the estimated tax on the gain portion of the escrow may be reduced appropriately.” The taxpayer could also file delinquent returns or pay any deficiencies or assessments that may have played a role in the determination of the amount escrowed.
1031 Exchange Considerations: If the seller is completing a 1031 exchange, which can defer NJ gain on the sale of real estate, the seller can put the DOT on notice of the exchange and obtain an exemption from the bulk sale withholding by properly completing and filing the TTD Form. The benefit of obtaining the exemption is that all or a substantial portion of the amount withheld will be released to be utilized by the intermediary. The taxpayer ideally wants the money sent directly to the qualified intermediary in order to avoid any constructive receipt issues. Because of the strict exchange timelines for identification, the sooner the state determines if the escrow can be released or reduced, the better because it factors into determining how much purchasing power the Exchanger will have.
Three additional considerations:
1. Discuss filing the TTD form with your tax advisors: To avoid delay or confusion, prior to the sale of relinquished property, the exchanger should check with their attorney and accountant regarding who will assist them in filing the TTD Form. Per the NJ DOT, the TTD Form can be filed at the time the Buyer files the C-9600, but not beforehand. Therefore, if the buyer agrees to cooperate, they can submit both forms in anticipation of the closing.
The below excerpt from the NJ DOT website discusses the timing of filing for the TTD Form:
31. When should an Asset Transfer Tax Declaration form be submitted?
If completion of the document (designated Form TTD) is required, it should be submitted to the Bulk Sale Section after the Division has assigned a caseworker to the case. Forms submitted before the receipt of the Bulk Sale Notification will be discarded. The seller may elect to give the form to the purchaser to submit with the C-9600. [NJ DOT Q&A updated 1/14/21]
2. Document the Escrow: The best practice is for the exchanger and closing agent to document the Bulk Sales withholding with a separate escrow agreement (can be a simple agreement) that states how much was withheld, that the withholding is pursuant to the DOT’s Notice, and instructs the closing agent to remit any amounts eligible to the qualified intermediary’s escrow upon receipt of a clearance letter or adjustment letter from the DOT.
3. Take Care to Avoid Potential Tax Liability: If estimated taxes are remitted to the state of NJ and not placed in the 1031 exchange escrow, or are returned to the taxpayer, this creates a constructive receipt issue. These funds would likely be taxable boot (non-like-kind property) and would probably be recognized as gain at the federal level and state level.8
THE NEW JERSEY GIT-REP REQUIREMENTS AND §1031
Some professionals refer to the NJ “Gross Income Tax Receipts Estimated Payment” (GIT-REP) as the New Jersey “Exit Tax.” This term is a misnomer. The GIT-REP is not an extra tax, but a withholding mandated by the state because the taxpayer may have a tax liability from the sale. The GIT-REP is applicable to non-resident taxpayers who are selling or transferring real estate in NJ and do not meet an exception. Like the Bulk Sales Law, the purpose of the GIT-REP is to keep money from leaving the state in situations where the taxpayer may not have any further connection to the state and could fail to file a state tax return. If there is no tax due upon filing a return, the taxpayer can receive a refund of the GIT-REP. This requirement is similar to the Non-Resident Real Property Estimated Income Tax Payment Form IT-2663 for New York State.
How does GIT-REP work in connection with an IRC 1031 exchange?
Short answer: Unless a non-resident taxpayer conducts a partial exchange the GIT-REP is largely irrelevant because all NJ gain would be deferred in a fully tax deferred exchange. In a partial exchange, where the taxpayer receives non-like kind property (boot), there would be a recognition of tax and GIT-REP would be applicable.
NJ P.L. 2004, C. 55, requires that on or after August 1, 2004, nonresident individuals, estates, or trusts that sell or transfer real property in New Jersey, make an estimated gross income tax payment on the gain from a transfer/sale of real property as a condition of the recording of the deed.
The estimated tax due shall equal the gain, if any, multiplied by the applicable rate. The amount of gain used in the computation shall equal the amount of gain reportable for federal income tax purposes for the taxable year in which the gain is recognized. However, the estimated tax payment shall not be less than 2% of the consideration for the sale or transfer stated in the deed affecting the conveyance.
New Jersey Tax Bulletin 57(R) (September 30, 2015) states that the GIT-REP rules apply to “a non-resident individual, estate, or trust selling real estate in NJ.” Logically, these rules should also apply to disregarded entities (single member LLCs that are non-tax partnerships) where the GIT-REP rules would apply to the sole member. However, the instructions for GIT-REP 3 Form (9-15) provide that “Individuals, estates, trusts, or any other entity selling or transferring property in New Jersey must complete this form if they are not subject to the gross income tax estimated payment requirements under N.J.S.A. 54A:8-9.” There appears to be a disparity between the Form’s requirements and those in the text of TB 57(R).
A nonresident seller is required to make an estimated income tax payment if none of the Seller’s Assurances listed on the Form apply to the transaction. If one of the Seller’s Assurances does apply, the taxpayer can use it to claim an exemption from withholding requirements.
Exemptions for a 1031 Exchange: A non-resident taxpayer commencing a 1031 exchange can file a GIT-REP 3 Form and claim Seller’s Assurance #7 which provides an exemption for gain deferred under IRC Sections 721, 1031, and 1033. In addition, the Seller could claim any other applicable Assurances/Exemptions. Assurance #7 further provides that “If the indicated section does not ultimately apply to this transaction, the seller acknowledges the obligation to file a New Jersey income tax return for the year of the sale and report the recognized gain. This would apply if the taxpayer fails the exchange or completes a partial exchange.
At the completion of the exchange, the non-resident exchanger is required to complete the GIT-REP 1 form which shows the value of the like kind property relinquished and the value of like kind property received in the exchange. The Qualified intermediary is required to withhold estimated payments of 2% for a New Jersey 1031 exchange where a non-resident taxpayer purchases replacement property but receives non-like kind property in the exchange (cash or boot). It appears that based on the broad language in the available guidance, the withholding would apply even in transactions where a non-resident relinquishes New Jersey real estate in exchange for replacement New Jersey real estate.
1N.J. S. A. 54:50-38
2For more information, see https://www.state.nj.us/treasury/taxation/realtytransfees.shtml
3FAQs available at: https://www.state.nj.us/treasury/taxation/faqbulksale.shtml
4Available at: https://www.state.nj.us/treasury/taxation/pdf/other_forms/misc/c9600.pdf
5See NJ Div. Taxation Technical Bulletin 60 available at: https://www.state.nj.us/treasury/taxation/pdf/pubs/tb/tb60.pdf
6See FAQs, note 2, supra, FAQ #19
7Per NJ Tech. Bul. 60, note 4, supra, “The escrow amount will include deficiencies (i.e. underpayments), delinquencies (i.e. unfiled tax returns), audit assessment(s) (fixed or pending) and the tax on the gain from the transfer of the asset(s).”
8For federal tax purposes, the amounts withheld by/remitted to the state are still sale proceeds – taxable gain unable to be offset with basis from the real estate exchanged because the taxpayer’s adjusted basis carries over into the replacement property.
9See NJ Div. Taxation Technical Bulletin 57 (“TB-57(R)”) – Issued September 30, 2015, “Estimated Gross Income Tax Payment Requirements on Sales of New Jersey Real Property by Nonresidents” available at: https://www.state.nj.us/treasury/taxation/pdf/pubs/tb/tb57r.pdf
For questions regarding this material, or to set up an exchange, please contact Legal 1031, an experienced New Jersey Qualified Intermediary and nationwide provider of qualified intermediary services.
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