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April 20, 2014

Avoiding the Documentary Stamp Tax

Documentary Stamp Tax: Pursuant to §201.02, Florida Statutes, subject only to a few specifically enumerated exceptions beyond the scope of this article, documentary stamp tax is due on instruments conveying an interest in real property at the rate of 70 cents per $100.00 of consideration (e.g., on a $100,000.00 sale, the documentary stamp tax due is $700.00).

Most practitioners and real estate investors are familiar with the 2005 landmark case Crescent Miami Center, LLC v. Florida Department of Revenue which, at its core, centered on the imposition of documentary stamp tax where an entity transfers property to another entity (where the grantor’s ownership interest in the selling entity is identical to the grantor’s ownership interest in the acquiring entity). An in-depth discussion of the Crescent decision and the statutory revisions the Florida legislature enacted in its wake is beyond the scope of this article. Suffice it to say, in the aftermath of Crescent and certain revisions to Chapter 201, Florida Statutes, conveying equity interests in entities (rather than deeds from entities) may still be a good way for investors to transfer real property and avoid the imposition of documentary stamp tax, in certain situations. There are, however, certain obligations of which investors should be aware.

How Can Documentary Stamp Tax Be Avoided? Where an entity (e.g., a limited liability company) (i) holds title to certain unencumbered real property and (ii) the owners of the entity’s equity interests (e.g., membership interests) have held same for greater than three (3) years, the equity interests can be transferred to a third-party purchaser (e.g., rather than the outright conveyance of the real property) without triggering documentary stamp tax. Consider the application of the foregoing to the sale of a $10,000,000.00 commercial building: a tax liability of $70,000.00 can be avoided by structuring the deal as a sale of equity interests rather than as an outright sale of the real property.      

What If The Equity Interests Have Not Been Owned For More Than Three Years? Then documentary stamp tax is imposed on the transfer of the real property based on the consideration paid (e.g., purchase price) at the aforementioned rate.

Documentary Stamp Tax Was Properly Avoided, What’s Next? Florida Statute §193.1556 requires that seller’s promptly notify the Property Appraiser of the county in which the property is located of any “change of ownership or control” of the entity holding title to the subject property. Generally, a “change of ownership or control” means the cumulative transfer of more than fifty percent (50%) of the ownership of the legal entity that owned the real property when it was most recently assessed (pursuant to Florida Statute §193.023, this is to occur annually). To that end, the Florida Department of Revenue has promulgated Form DR-430 and DR-430M (where multiple parcels of real property are affected). These simple to use forms are to be filled out by the seller and, as indicated above, returned to the appropriate county Property Appraiser.

What’s The Effect Of The Form DR-430? In practice, submitting the form typically triggers more scrutiny in the annual assessment of the real property (as conducted by the county Property Appraiser) which, in turn, causes the buyer’s real property taxes to increase. Consider that, pursuant to Florida Statutes §§193.1554 and 193.1555, certain non-homestead residential real property and non-residential real property may not exceed annual reassessments in excess of ten percent (10%). For example, if you owned a $1,000,000 beach house and property values went up thirteen percent (13%) in one year, your assessed value should not go up by more than $100,000.00. If you extrapolate this over many years, you can understand the benefit; eventually a property owner is paying (lower) property taxes on a property worth far more than its assessed value as a consequence of the aforementioned tax cap. The effect of submitting the DR-430 is to nullify any built-up discrepancy between assessed value and market value. The buyer’s reassessed value will likely be closer to the purchase price than the assessed value the seller (who has owned the equity interests for at least three years) was enjoying. Consequently, the buyer’s property taxes will almost certainly increase in this type of business entity equity interest acquisition ((i) a small price to pay to avoid documentary stamp tax and (ii) the property taxes would similarly increase pursuant to a reassessment if a deed was conveyed).

Conclusion: On the sell-side of residential and commercial transactions alike, where the property is held by a business entity, the seller should carefully consider a sale of the equity interests in the entity rather than an outright sale of the land, as they may be saved from paying substantial documentary stamp taxes. On the buy-side of residential and commercial transactions, buyers should consider creating a new business entity as a holding company for the real property; this strategy may make the most sense for investors intent on holding the property for more than three years in order to capitalize on what many believe is a buyer-friendly market.

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About the Author

Shareholder

Mitchell I. Horowitz practices in the area of civil tax controversies with the Internal Revenue Service and Florida Department of Revenue, including U. S. Tax Court, federal district court and state court litigation; transactional and business law representation.  He represents individuals, tax exempt entities and business organizations, handles audit and collection matters, and performs annual tax maintenance audits for businesses and tax exempt entities.  Mr. Horowitz is a member of the Firm's Emerging Markets Team, as well as other industry teams. He represents...

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