Taxes on Transfer of a Controlling Interest in a Real Property Entity
January 24, 2012
This posting may appear to be outdated, after all, why would I be discussing a change in Maryland law that occurred three and a half years ago? The reason is because the rate of commercial real estate sales and purchases have decreased considerably over the past few years - most people would say due to the economy – and when purchasers are ready to get into the market again, they may believe that the transfer tax rules for the purchase of property are the same. Unfortunately, that is not the case.
Years ago, property transfer and recordation taxes were only due and payable when a new deed was recorded. Thus, in order to avoid Maryland’s hefty tax rates, instead of structuring a transaction where a new party would purchase land outright from an existing owner, parties would buy a controlling interest in the legal entity that owned the real property. It became common for properties to be titled in the name of a single purpose LLC and then by structuring a transaction as a purchase of the Membership Interests (or ownership) in the LLC, the title on the property would remain the same, namely, the LLC, but the underlying, actual owners of the company would change. No transfer or recordation tax would be due since no new deed was recorded. The tax benefit for this type of transaction continued past closing, as the Maryland State Department of Assessments and Taxation (SDAT) would have difficulty increasing real property tax assessments since it did not have access to the new purchase price paid for the land.
In 2008, Maryland law changed. Transfer and recordation taxes are now due upon the transfer of a “controlling interest in a real property entity.” The taxes will apply to a transaction where more than 80% of the value of the controlling interest is transferred to a new party and where the real property has a value of at least $1,000,000. Note that there are a few narrow exemptions to this tax requirement as listed on SDAT’s website. Keep in mind that a Transfer of a Controlling Interest Reporting Form must be filed with SDAT within thirty days of the real estate transfer.