State & Local Tax: Controlling Interest Transfer Tax

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Do you own an entity that holds real estate? Are you thinking about selling real estate? Are you considering selling the real estate asset or selling the entity that owns the real estate?

Generally, a real estate transfer tax is imposed on documents that convey an interest in real estate from one person to another person. The transfer tax, generally, is imposed on the recordation of a deed and is based on the consideration paid or the fair market value of the property (the “Real Estate Transfer Tax”).

Taxpayers utilized 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. Approximately 17 states have closed such loopholes.

The 17 states are: Connecticut, Maine, Washington, the District of Columbia, Maryland, Michigan, New Hampshire, Delaware, California, New Jersey, New York, Florida, Minnesota, Illinois, Pennsylvania, Rhode Island and Vermont

Generally, the 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 is applied to the value of the property transferred apportioned by the percentage of the ownership interest transferred.

Taxpayers considering stock acquisitions, or other mergers or reorganizations, of entities that own real estate should be particularly aware of the exposure as a result of not paying a controlling interest transfer tax. Even if a merger qualifies as a tax-deferred reorganization under the federal tax code, a controlling interest transfer tax may be imposed if the transfer represents ownership change in an entity holding real estate and there is no applicable exemption.

The scope of the controlling interest transfer tax varies from state to state, such as tax rates, applicable exemptions, and the meaning of “transfer of control.” If you are considering selling or purchasing an entity that owns real estate or reorganizing your corporate structure, you must analyze whether the transaction will be subject to a controlling interest transfer tax.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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