Under the provisions of the Tax Reform Act of 2007, the Maryland House of Representatives has acted to close a tax loophole that allows large commercial real estate interests to avoid paying recordation and transfer tax fees by setting up LLCs for the sole purpose of owning real property. At least 10 other states and the District of Columbia have already closed such loopholes.

Unlike homeowners and small business owners—who must pay recording and transfer taxes equal to 2% of the sales price when they buy or sell Maryland real estate—corporations have been able to avoid paying these fees by selling a controlling interest in the LLC instead. Though such “controlling interest” sales do, in fact, transfer ownership of real estate from one party to another, they do so without creating taxable real estate transactions because the actual deeds to the property owned by the LLC do not change hands.

Selling a controlling interest in an LLC rather than selling the property directly to a buyer has created serious tax savings for some corporations. Had this loophole not existed, last year’s sale of Baltimore’s downtown 30-story Alex Brown building, made to an out-of-state company and handled by a Philadelphia firm, would have added an estimated $2.4 million to the state’s coffers.

The Maryland House voted to close the controlling interest loophole by requiring corporations to pay both recordation and transfer taxes when the real estate being transferred through the transfer of the controlling interest of that corporation is valued at $1 million or more. Legislators also proposed that the revenue generated be channeled to school construction, restoring state parks, and open space programs.

The Maryland Chamber of Commerce opposed the legislation on the grounds that the new tax “will add a major element of complexity and uncertainty in transferring Maryland business interests that will make Maryland commercial real estate less attractive for investment.

Other relevant links:

http://speakerbusch.com/2007sessionltr.htm

http://www.gov.state.md.us/pressreleases/070921.html

Tags: commercial real estate tax law, commercial real estate taxes, maryland commercial real estate, tax advantages of commercial real estate

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