Selling a home which you recently rented out because of the difficult real estate market? Well, you may discover that at closing, the state of New Jersey may want to escrow part of your closing proceeds to cover any existing tax debt or estimated taxes on any gain from the sale. 

Due to recent changes in the New Jersey Bulk Sale Law (N.J.S.A. 54:50-38), transfers of income producing real estate are likely to generate a notification by the buyer to the Division of Taxation of the transfer, thereby providing the State with the opportunity to inquire into possible tax debts of the transferor, and perhaps requiring a possible escrow of sale proceeds at closing.

Bulk Sale notification previously pertained to the sale of assets of a business which were not sold in the ordinary course of that business. Now, as a result of a change in the law, and a recent interpretation of the amended Bulk Sale notice law, the State of New Jersey is applying the Bulk Sale Law to transfers of income producing real estate.

Effective August 1, 2007, the Bulk Sale law in New Jersey was modified to provide, among other things, that whenever a person, subject to any state tax, shall make a sale or transfer of any part of his business assets, otherwise than in the ordinary course of business, the person taking title shall notify the Division of Taxation of the proposed acquisition at least 10 days prior to taking possession. According to the statute, failure to comply with the notice requirement will cause the purchaser to be personally liable for the payment of any State taxes due from the seller.  This would include taxes, fees, interest and penalties imposed by any State tax law. To protect himself from this potential liability, the person taking title will want to file a bulk sale notice.

Technical Bulletin TB-60, issued by the Division of Taxation on July 3, 2008, defined a “bulk sale” to mean any sale or transfer of a person’s business assets, not made in the ordinary course of business. “Business assets” include “realty if the primary use of the realty is to support a business on its premises.” “Business” means any endeavor from which revenue is realized for the purpose of generating a profit or loss.

According to TB-60, for a bulk sale notice to be effective, it must be filed by the purchaser/transferee, on the appropriate Division of Taxation form, include a signed agreement between the parties setting forth the terms of the transaction and be received by the Division at least 10 days before the proposed transfer. The Division will review the transferor’s account to identify outstanding liabilities.  Within 10 days, the Division will forward a notice to the attorney or designee for the transferee of the amount, if any, to be held in escrow at closing. The amount to be escrowed will include existing tax debts, delinquencies, assessments and importantly, tax on the gain from the transfer of the property. The transferor may file an Asset Transfer Tax Declaration form to assist the Division on calculating the estimated tax on the gain. This may cause the escrow amount to be adjusted. Payment of the taxes identified as due, would then be made from the escrow.

Thus, if a rental property, even though residential in nature, is sold, the Division of Taxation seeks to be notified 10 days in advance, and if a buyer does not, the buyer risks becoming liable for the tax debt of the seller.