MD real estate transfer tax loopholes — dead or alive?
By: Myles, May 7th, 2008
July 1st is almost upon us. And in the current edition of the Maryland Register, the State Department of Assessments and Taxation (SDAT) has published its proposed regulations to implement the recordation and transfer taxes on the transfer of a controlling interest in a real property entity. Have the loopholes been closed?
This issue is not one of first impression for us: Noted attorney Robert M. Ercole, from Neuberger, Quinn (NQGRG) said in his Daily Record column penned last December 2007, and posted on the MarylandCommercialTitle.com Blog that the proposed new tax is one of the corporate loopholes sought to be closed by Gov. Martin OMalley in the recent Special Session of the General Assembly and will take effect on July 1 (comment period ends May 27, 2008).
In a nutshell, we outlined that prior law allowed corporations, LLCs, partnernships, and other entities get around the transfer and recordation taxes on real estate by selling not the property, but rather a controlling interest in the subsidiary that owns the property.
According to the Daily Records: On The Record Blog, the new law, contained in Tax Property Article 12-117(c) and 13-103(b), was supposed to treat both transfers the same, tax-wise. SDAT estimated that would bring in an extra $62 million in Fiscal Year 2009 $14 million for the state, and $48 million in local recordation and transfer taxes.
The lawmakers, however, left a lot of details up to SDAT and not everyone in the real estate community is happy with the results. What are your thoughts?
Just reported in The Daily Records Blog: On the Record noted Marland attorney Bruce L. Benshoof, from Ballard Spahr, has some very specific insights regarding the proposed regulations: SDATs definition of beneficial ownership and the treatment of step transactions, that is, sales of beneficial interests that occur over the course of time.
For all the details, read Benshoffs insightful comments, in full, right here. In sum, he articulates that that the regulations should ensure the following: (i) a tax is imposed when a transaction is structured involving a controlling interest in a real property entity to avoid payment of the recordation tax; (ii) exemptions provided by law when real property is transferred by an instrument of writing are applicable; and (iii) there is no double taxation of a single transaction. Benshoof concludes that only the first purpose has been restated as part of the proposed regulations, some of which are particularly controversial:
- Beneficial ownership: The statute defines a real property entity as a corporation, partnership, association, limited liability company, limited liability partnership, other unincorporated form of doing business, or trust that directly or beneficially owns [Maryland] real property that: 1. constitutes at least 80 percent of the value of its assets; and 2. has an aggregate value of at least $1 million. Under the proposed regulations, beneficial ownership of real property is defined to include ownership, directly or through multiple tiers, of an interest in an entity or trust that directly owns the property. In other words, a parent entity is treated as if it directly owns its proportionate share of a subsidiary’s assets. If at least 80 percent of the assets of a parent entity consist of ownership of Maryland real property through one or more subsidiaries and the aggregate value of the real property is at least $1 million, then the parent entity itself would be a real property entity and a transfer of more than 80 percent of the interests in that parent entity would make the parent entity liable for the tax.
- Step transaction doctrine: Notwithstanding the exemption provided in the statute for multiple-step transfers completed over more than 12 months, the proposed regulations expressly incorporate the judicial step transaction doctrine in order to treat earlier steps as having all occurred at the same time as the step that affects the transfer of more than 80 percent of the interests in the real property entity. For example, if seller agrees to sell to buyer 50 percent of the interests in a real property entity today and the remaining 50 percent more than 12 months later, the transfer would appear to fall within the statutory exemption for transfers completed over a period of more than 12 months. However, under the proposed regulations, if the two steps could be treated as a single transaction under the step-transaction doctrine as defined in Read v. Supervisor of Assessments, 354 Md. 383, 731 A.2d 868 (1999), then both steps would be treated as having occurred at the time of the second step and the exemption would be denied. .
Many questions still remain, but — as is true with everything we do — there are planning opportunities in contemplation of the new tax.
The department is accepting comments on the proposed regulations through
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