The New York State Department of Taxation and Finance (the department) recently opined that a membership interest in a single-member LLC (SMLLC) owning a New York condominium is real property subject to New York State "estate tax." This conclusion is based on and applies to SMLLCs that are "disregarded" for Federal income tax purposes.
In Advisory Opinion (TSB-A-15(1)M May 29, 2015), the department responded to a New York resident (the Petitioner) who contemplated contributing his New York condominium to a disregarded SMLLC and then moving to another state. The Petitioner intended to remain the sole owner of the SMLLC for the remainder of his life and to reside outside of New York until his death. The Petitioner asked whether the SMLLC is "intangible property" for estate tax purposes and would therefore not be treated as real property for New York State estate tax purposes. The department, in considering the SMLLC's sole ownership, reasoned that the assets and activities of a disregarded SMLLC should be treated as the assets and activities of the SMLLC’s sole member/owner. Accordingly, the condominium held by the SMLLC would be treated as real property held by the Petitioner for New York State estate tax purposes.
New York State imposes estate tax on the transfer by the estate of a non-resident decedent of real property and tangible personal property located in New York. In general, the transfer of a New York condominium by the estate of a non-resident decedent is subject to estate tax. New York real property may be held by a corporation or partnership; however, the interest in such entity (i.e., the corporate stock or partnership interest) constitutes intangible property. New York does not impose estate tax on intangible property held by non-residents, even if such property is located in New York. Accordingly, the New York State estate tax is not imposed on the transfer by the estate of a non-resident decedent of an interest in a corporation or partnership that holds New York real estate.
Under U.S. Treasury Regulations, the tax classification of a business entity is determined by its number of owners and by an election, if any, made by the entity. A business entity with only one owner is classified as either a disregarded entity or a corporation. As a default, a SMLLC is disregarded as an entity separate from its sole member/owner and the tax attributes of the SMLLC are imputed to its sole member/owner. Alternatively, a SMLLC may file IRS Form 8832 (Entity Classification Election) to be classified as "an association and taxable as a corporation." An LLC with two or more members (i.e., owners) is classified as either a partnership or a corporation. As a default, a multimember LLC is treated as a partnership and its tax attributes pass through to its members. Alternatively, a multimember LLC may file Form 8832 to be classified as a corporation.
In its Advisory Opinion, the department narrowly addressed a specific estate tax inquiry as it related to the facts presented by the Petitioner. Decisions regarding entity classification may have significant federal and state tax implications and filing requirements. Accordingly, taxpayers should make such decisions in consultation with their professional advisors.