6A — August 26 - September 15, 2016 — Commercial Real Estate Law — M id A tlantic
Real Estate Journal
www.marejournal.com
C ommercial R eal E state L aw By Jessica T. Zolotorofe, Esq., Ansell Grimm & Aaron, PC Controlling Interest Transfer Tax
T
he majority of U.S. states impose a tax on the conveyance of
Tax in 1986. Yet thirty years later, only about one-third of states have followed suit. And even among those states that do have some form of a non- deed transfer tax, laws are entirely inconsistent. (1) Entities Subject to the Tax. Many states only tax the conveyance of a controlling interest in entities that are in the real estate business. Under Pennsylvania law, for example, a ‘Real Estate Com- pany’ is defined as an entity that is in the business of hold- ing, selling or leasing realty, which either (a) derives 60%
or more of its annual gross receipts from ownership or dispossession of real property, or (b) real estate accounts for 90% or more of its tangible assets. Initially, the two tests only considered property with- in the State when calculating the percentage, but a recent amendment to the Pennsylva- nia Code now considers all real property owned by the entity, wherever located. To the contrary, Washington DC, still only considers prop- erty located within its jurisdic- tion. There, the tax is imposed if more than 50% of an entity’s gross receipts are from real
property located within the District; or if the entity holds real property located within the District that has a value comprising 80% or more of its tangible assets. There are also a number of exceptions and exemptions, which, in certain jurisdictions include publicly traded stock, mergers and acquisitions, or non-profit organizations. (2) What Qualifies as a “Controlling Interest”? State laws also vary as to the definition of ‘controlling interest’. In Pennsylvania, the tax is applicable when 90% or more of the interest in an
entity is transferred. In Vir- ginia, there is an exemption from the realty transfer fee when less than a 50% interest is conveyed. Other examples include Maryland and Delaware, each of which consider a control- ling interest to be more than 80%, and New Jersey, having among the most restrictive ‘non-deed transfer tax’ laws, assesses any conveyance of interest of more than 50% when the consideration is in excess of $1,000,000. Some states outside of the Mid- Atlantic region do not specify or define ‘controlling interest’ and have left it to the taxpay- ers’ interpretation until such time as the tax-courts rule on the issue. (3) Series of Transactions. Controlling interest transfer tax may be imposed in connec- tion with a single transaction, or when interest is conveyed in a series of transactions. Delaware and Pennsylvania have the most stringent time frames, both considering all transactions completed within three years to be part of a single transaction, while New Jersey only extends out six months. Many states’ laws are silent in this regard, but may expressly indicate, like the Virginia Code, that suc- cessive transfers cannot be with the intent to avoid realty transfer tax. (4) Calculating the Tax. Some jurisdictions calculate the tax based upon the consid- eration paid for the interest. Others use fair market value or equalized assessed value of the real property owned by the entity. With the State assessing 1% of the value of the realty held by the entity, and the counties charging up to 4%, Pennsylvania’s control- ling interest transfer tax can be among the highest in the Country. (5) States that Impose the Tax. Other than those mentioned above, the following states im- pose some form of a ‘non-deed’, ‘controlling interest’, or ‘change in ownership’ transfer tax: Washington New Hampshire Illinois Rhode Island Connecticut California Maine Florida Minnesota Michigan Virginia Rhode Island The information and exam- ples in this article should not continued on next page
real proper- ty. However, the transfer of member- ship interest in an entity t ha t own s real proper- ty effectively conveys the
Jessica Zolotorofe
property without necessitat- ing the recording of a deed. New York recognized the loss of revenue that results from this loophole and enacted the Controlling Interest Transfer
• Complex Local and National Commercial Transactions
• Retail and Mixed-Use Development • Representation of Real Estate Investment Trusts • Tax Appeals • Land Use and Zoning • Real Estate Related Litigation
• Property Acquisition and Disposition • Commercial Property Financing • Leasing Matters on Behalf of Tenants, Landlords and Real Estate Brokers
• 1031 Exchanges
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