What is the New York Special Accrual Rule?
Many individuals wrongly assume that if they change their state of residency, statutory residency and domicile from New York to another state (often a low or no tax state such as Florida) that income (incentive compensation) and gains (appreciation in stocks and investments) cease to be subject to New York State and City tax if such income or gain is recognized after they move. Much to their surprise, New York has special tax laws which, in certain instances, continue to subject such income and gains to continuing New York State and City taxation or worse, triggers a tax bill on such unrealized income and gains when they move. Specifically, New York's special accrual rule provides:
"[i]f an individual changes status from resident to nonresident he shall, regardless of his method of accounting, accrue to the period of residence any items of income, gain, loss, deduction, or ordinary income portion of a lump sum distribution accruing prior to the change of status."
NY Tax Law §639; New York City Administrative Code § 11-1754[c][1](making the special accrual rule applicable for New York City income tax purposes).
When Does Income or Gain Accrue?
The question thus becomes when did an item of income or gain accrue and did that occur before or after the change in residency and domicile. While there have been some decisions in New York as to when an item of income or gain accrues, the law does not provide clear answers for many situations. Under the accrual method, an item must be included in the taxable year “when all the events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy . . . ” In the Matter of Garg, DTA No. 829955 (N.Y. Div. Tax App. May 4, 2023); Treas.Reg. § 1.446-1 [c] [1] [ii] [A].
Examples of Accrued Items
Some examples of items that are treated as accrued while someone was a New York resident (and remain taxable even if the person ceases to be a New York resident) include the following:
- The unrealized income from an installment sale made while a person was a New York resident.
- Payments that a person will receive from a lottery that the person won while the person was a New York resident.
- Vested incentive compensation.
Unrealized Gains and Changing Domicile
One area that has created some disputes over the years involve situations where a taxpayer has entered into a contract to sell property. To the extent that all material conditions have been met prior to the time that the person ceases to be a resident, such taxpayer remains taxable under this special accrual rule. By contrast, if such person ceases to be a New York resident prior to the time all contingencies to the closing of the sale have been met, then the gain will not be subject to the special accrual rule and in many cases, escape New York tax. See N.Y. Comp. Codes R. & Regs. Tit. 20 § 154.10. Hence, if taxpayer has an unrealized or built-in gain in an investment (that is not otherwise sourced to New York (such as NY real estate)), if the person changes their domicile and residency to another state, such built in gain should escape New York income tax if the person sells such property while domiciled and resident in the new state.
What is of particular concern is that the special accrual rule can impose tax in the period that New York State and/or New York City residency is terminated even though the asset isn't disposed of. See IT 260 Instructions. The rules provide that if the status of an individual changes from a New York State resident to a nonresident, the individual must accrue (that is include and report) on his or her New York State part‑year or full‑year resident return any items of income, gain, loss, or deduction that under an accrual method of accounting would be reportable at the time of the change of residence even though the asset hasn't been disposed of. The rules do permit a taxpayer to defer paying tax on this gain until actually recognized upon a sale or disposition, but the taxpayer is required to complete specific forms and in most cases post bonds or sureties to secure payment of the tax when due. Substantially similar rules apply for New York City purposes.
The Importance of Residency Determinations
As should be apparent from this discussion, determination of domicile and residence (including day count tracking to the extent it is a determining factor in residence and domicile) is a critical factor in establishing that a taxpayer has ceased to be a New York resident (and become domiciled in another jurisdiction) prior to the accrual of certain income or gain items. New York auditors have been particularly aggressive in challenging a change in residency status when a large gain is recognized after the change. See Matter of Ingle vs. Tax Appeals Trib. of the Dept. of Taxation & Fin. of the State of N.Y. The Domicile365 App has been designed to provide precise day count tracking for individuals and enterprises to assist in this determination. For more information on the Domicile365 Day Count Tracking App and its day count tracking features, please see our software page and download the Domicile365 App . Available for Apple iOS and Android devices.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors regarding these matters.
