Given high real estate tax rates in Ohio, clients often ask us if a higher property valuation for real estate tax purposes can be avoided by purchasing membership interests rather than purchasing the real estate directly. Frequently, the seller will transfer the real estate to a newly formed limited liability company just prior to closing and the purchaser will purchase all of the membership interests at closing. So, does it work? Likely not the way one purchaser imagined.

Recently, a purchaser of an office building discovered that this route does not guarantee avoiding a higher property valuation. The seller transferred its property to a newly formed limited liability company. It then sold its membership interests for $16 million. The newly formed company simultaneously merged with the purchaser. The property was later valued at $11,529,900 by the Cuyahoga County auditor, triggering a challenge by the local school board. The Board of Tax Appeals labeled the transaction as a purchase of real estate guised as a purchase of membership interests.

Typically, where there is a sale of membership interests, the purchase price includes assets in addition to real property. In this case, the Court of Appeals determined that there were no assets other than the real estate owned by the limited liability company. Therefore, a purchase of all of the membership interests was the same as the purchase of the real estate and could be used as a recent sale of the property to determine the valuation for real estate tax purposes. To read the full case, Orange City Schools Bd. of Education, et al v. Cuyahoga County Bd. of Revision, click here.