In 2007 the New Jersey bulk sales law was expanded to apply to all transactions involving the sale of any part or whole of business assets (with the exception of inventory). The purpose of the bulk sales law is to allow the Division of Taxation (DOT) time to review the seller’s tax accounts to determine if there are any outstanding tax liabilities which can be recouped at the time of the sale. New Jersey has an extremely broad definition of a bulk sale including even the sale of a singular business asset. Also included in this broad definition of assets subject to bulk sales law are real estate transactions. These rules often create added complexity for real estate investors.
Real estate transactions to which bulk sales law apply include:
- Sale of rental real estate
- Sale of real estate used in a trade or business
- Sale of any real estate (other than inventory) owned by a business entity (corporation, partnership, LLC, etc.)
- 1031 like-kind exchanges
- Transactions involving a deed in lieu of foreclosure for income producing properties
- Auction sale that is not court-ordered
Real estate transactions exempt from bulk sales law include:
- Sale of a “simple dwelling house” (1 or 2 family home) by an individual, estate or trust
- Sale of real estate inventory by real estate builders or real estate dealers
- Sheriff’s sale
The purchaser of business assets in any bulk sale transaction is responsible for notifying the DOT at least ten days prior to closing that the proposed sale will be taking place. The notification (Form C-9600) is typically filed by the purchaser’s attorney. If the purchaser fails to provide this notification, the purchaser could become liable for all outstanding State tax liabilities owed by the seller.
Within ten days of the filing of the bulk sales notification, the DOT will forward a notice of required escrow notifying the purchaser of the amount of the sales proceeds to place into an escrow account. Once the purchaser receives the notice of required escrow, the purchaser’s agent must withhold this amount from the sales proceeds. The escrow withholding is required in all transactions, even if the sale is part of a 1031 like-kind exchange.
Once the purchaser notifies the DOT about the impending sale, the DOT will issue a request for information from the seller. As part of this request, the seller will need to complete Form TTD Asset Transfer Tax Declaration estimating the taxable gain on the sale, net of the current year’s operating losses and net of gain deferral due to a 1031 like-kind exchange, if applicable. These should be filed as quickly as possible since the information can reduce the amount the DOT will escrow. Withholding will be required on the net gain for both residents and non-residents. The DOT will also request information for any unfiled tax returns and outstanding tax balances. Failure to comply with this request will result in the entire escrow amount being withheld as a tax payment made on behalf of the seller. This can be especially damaging to a seller participating in a 1031 like-kind exchange as all sales proceeds must be reinvested as part of the transaction in order to defer a gain. After the DOT reviews the documentation provided, they will notify the purchaser to either release the escrow to the seller or to remit a required tax payment to the DOT.
As with any business transaction it is important to communicate well in advance with your tax professionals and advisors in order to ensure proper compliance and planning. We are happy to provide you with assistance on this issue, or any other tax related matters.