Volume 3 - Opinions of Counsel SBEA No. 123
Aged exemption (income requirement) (gain from installment sale) - Real Property Tax Law, § 467:
When an individual sells real property on an installment method, the income of such individual for purposes of section 467 of the Real Property Tax Law should include the gain he realizes each year from sales on the installment method. Such “gain” includes not only interest on the sales price but also the actual increase in value over the cost to the vendor.
We have received an inquiry concerning the definition of “income” for the purposes of section 467 of the Real Property Tax Law which authorizes a partial exemption from real property taxation for residential real property owned by aged persons meeting certain qualifications.
In this case an individual, over sixty-five years of age, has been selling building lots and has been receiving monthly payments from the buyers. The purchase contracts show amounts for principal and interest. The question is whether only the interest would be considered as “income,” or if a net gain would have to be determined based on the increase in value from the date of purchase to the date of sale.
Section 467 of the Real Property Tax Law authorizes a granting municipality, at its option, to set an income limit of between $3,000 and $6,000 for the income tax year immediately preceding the date of making application for exemption. This section further provides that “[s]uch income shall include social security and retirement benefits, interest, dividends, net rental income, salary or earnings, and net income from self-employment, but shall not include gifts or inheritances.” This language clearly indicates that the ordinary income tax rules do not apply when computing income for purposes of section 467.
Under the Federal tax system, an individual selling property in the manner described, may opt to report his income from such sales on the “installment method” (Internal Revenue Code, § 453). That method requires such amount to be reported each year as is “. . . that proportion of the installment payments actually received that year which the gross profit realized or to be realized on the sale bears to the total contract price” (Rev. Rul. 65-155). The ordinary rule is that gain from the sale of property is the excess of the amount realized (i.e., the total contract price, including principal and interest) over the adjusted basis (generally the original cost) of the property, and the loss is the excess of such basis over the amount realized.
The apparent intention of the Legislature of New York State in providing for the income requirements in section 467 of the Real Property Tax Law was to exclude anyone who had a set amount of cash accruing to him with which to meet expenses during the income tax year immediately preceding the date of making application for exemption. Therefore, it is the opinion of this office that whether or not the taxpayer opts for the installment method of reporting income for federal tax purposes, the income of such taxpayer for purposes of section 467 should include the gain he realizes each year from sales on the installment method (i.e., he cannot choose to report his overall gain totally in the first year, and thus leave himself without income to report from such sales in the year following, when he is still receiving installment payments on such sales). As previously noted, “gain” includes not merely interest, but the actual increase in value over the cost to the vendor.
The following example should put these concepts in a better perspective. “T,” a sixty-five year old taxpayer, purchased 100 acres of land for $20,000 in 1964. In 1974 he agreed to sell this property to “X” for $40,000, with “X” to pay off the purchase price in five equal, annual installments (interest of $4,000 is included in the $40,000 contract price). Assuming the interest is paid at $800 per year over the next five years, “T” has interest income of $800 to report for purposes of section 467 in each of those years. Exclusive of such interest, “T’s” gain from the sale is the amount realized ($36,000) less the adjusted basis ($20,000), or $16,000. However, this gain is realized at the rate of $3,200 per year for each of the next five years. Such gain is reportable as income for purposes of section 467. Thus, “T” in our example, has total income of $4,000 from this sale each year for five years.
The fact that the profit from the sale may be treated as a long term gain from the sale of a capital asset for federal income tax purposes does not change the result, as we have previously stated that the philosophy of the special treatment accorded to capital gains for federal income tax purposes has no relation to the principle of measuring the actual amount of cash available to the property owner for the purposes of section 467.
The Court of Appeals in Engle v. Talarico, 33 N.Y.2d 237, 306 N.E.2d 796, 351 N.Y.S.2d 677, construed the income provision of section 467. In its opinion the court stated the Legislature expressed no intention of incorporating the federal or state income tax rules into the exemption statute. The court further indicated that the statute contemplated using the term “income” to embrace capital gains, and that a transfer, return or redelivery of capital is not income for purposes of section 467. Therefore, as noted above, the cost to the taxpayer-applicant of the property must be deducted from the contract selling price in order to determine his “income,” and the total amount of the difference must be considered as income notwithstanding the fact that there may be a long term gain situation for income tax purposes.
February 21, 1974
NOTE: Construes law prior to L.1992, c.145, which allowed the income of only one spouse to be considered under certain circumstances. Note also that the maximum income limitation has been repeatedly increased since this Opinion was issued.