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Controlling-interest real estate transfer taxes
The potential state tax trap in mergers and acquisitions
As merger and acquisition activity appears once again on the upswing in the United States, the imposition of state and local real estate transfer taxes on these transactions remains a significant yet potentially overlooked cost. Because corporate mergers and acquisitions generally do not involve direct, deed-effected transfers of real property, there is often a misconception that real estate transfer taxes do not apply.
State transfer taxes
Depending on the law of the applicable taxing jurisdiction, a merger or other change in control of a legal entity can result in imposition of these taxes in the same way as the outright sale of a company’s real estate assets.
Generally, a transfer tax is imposed on documents that convey an interest in real property from one person or legal entity to another person or legal entity. The federal government imposed a documentary stamp tax on transfers of real property deeds until the tax was repealed in 1967. After the federal documentary stamp was repealed, states began to enact their own laws to impose transfer taxes on real estate transfers.
Many states have patterned their taxes after the federal documentary stamp tax. Historically, state transfer taxes generally have been imposed on the recordation of a deed and are based on the consideration paid or fair market value of the property. However, the state laws and tax rates can vary greatly across taxing jurisdictions.
In recent years, some states have expanded their transfer tax laws to impose taxes on transfers of an ownership real estate (rather than imposing tax only when the real estate itself is transferred). Such taxes are commonly known as “controlling-interest transfer taxes.”
This article provides an overview of the various state taxing regimes that impose controlling-interest transfer taxes, highlights some of the nuances of each state’s rules, provides some common pitfalls associated with such taxes, and describes emerging trends.