Do you own an entity that owns real estate? Are you planning to sell real estate? Are you considering selling the real estate asset or selling the entity that owns the building?
Typically, a real estate transfer tax is imposed on documents that transfer an interest in real estate from one person to another. Transfer tax, in general, is imposed on the registration of a deed and is based on the consideration paid or the fair market value of the property (the “real estate transfer tax”).
Taxpayers have used loopholes to avoid paying the real estate transfer tax, by selling the entity that owns the real estate instead of selling the real estate itself. About 17 states have closed these loopholes.
The 17 states are: Connecticut, Maine, Washington, District of Columbia, Maryland, Michigan, New Hampshire, Delaware, California, New Jersey, New York, Florida, Minnesota, Illinois, Pennsylvania, Rhode Island and Vermont
Typically, laws state that a controlling interest transfer tax is imposed on a direct or indirect transfer or acquisition of a controlling interest in an entity with title to real estate in the state. The tax rate applies to the value of the goods sold distributed as a percentage of the stake sold.
Taxpayers considering stock acquisitions, or other mergers or reorganizations, of entities that own real estate should be particularly aware of the exposure resulting from non-payment of a tax on the transfer of controlling interest. Even if a merger is considered a tax-deferred reorganization under the Federal Tax Code, a tax on the transfer of controlling interest may be imposed if the transfer represents a change of ownership in an entity holding real estate and it does not there is no applicable exemption.
The scope of the tax on the transfer of controlling interest varies from state to state, such as tax rates, applicable exemptions and the meaning of “transfer of control”. If you are planning to sell or buy an entity that owns real estate or reorganize your business structure, you should analyze whether the transaction will be subject to a majority stake transfer tax.