Controlling Interest Transfer Tax

By: George Rendziperis, J.D.

If you own an entity that owns real estate and considering selling such entity, you must consider whether the state in which the real estate is located imposes a real estate transfer tax on the sale of a controlling interest in an entity. 

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

Taxpayers took advantage of some tax planning to avoid paying the Transfer Tax.  For example, taxpayers would sell the entity that owns the real estate versus selling the real estate asset.  Certain states have caught on to this tax planning idea and closed the loophole. 

The states which have closed the loophole and impose a real estate transfer tax on the sale of a controlling interest in an entity that owns real estate 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

These states impose a controlling interest transfer tax 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.

If you are considering a stock, partnership or membership interest acquisition of an entity that owns real estate, or if you are considering a corporate merger or reorganization of entities that own real estate, you must be aware of the exposure as a result of not paying a controlling interest transfer tax if such real estate is located in the states listed above.    

Note, even if a merger qualifies as a tax-deferred reorganization under the federal tax law, a controlling interest transfer tax may be imposed if the transfer represents ownership change in an entity holding real estate and such state does not have an exemption of such transfer.

The meaning and laws 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.

Please contact George W. Rendziperis at grendziperis@hancockaskew.com or 512.663.0132 to determine whether your transaction would be subject to the Controlling Interest Transfer Tax.