Businesses considering buying or selling real property, making improvements to real property, or undergoing a merger or transfer of a controlling interest, must consider the impact of state and local real estate transfer taxes. Many businesses are facing unprecedented challenges with global pandemics and uncertain economic conditions resulting in more frequent transfers or organizational changes. Regardless of economic conditions, real estate transfer taxes can stymie the most prepared transaction team. Preparation is key, thus all due diligence should include a comprehensive review of whether and how transfer taxes apply to a transaction.
Virtually all businesses, no matter the industry, own or maintain long term leases on real estate. Many businesses undergoing mergers and acquisition activity, incurring losses or experiencing negative cash flow, are contemplating the future of their real estate holdings. This is particularly true of businesses with unused office space due to employees working remotely due to COVID-19 restrictions. COVID-19 and a distressed economy could result in some businesses seeking to sell real property. Many businesses will try to renegotiate long-term leases. Still other businesses are likely to see property ownership change by virtue of a merger, acquisition or change in entity form. At the same time, there are segments of the economy that are expanding both in terms of revenue and capital investment. Weathering the crisis relatively well, these businesses may seek to take advantage of a down market by becoming buyers of real estate. There will also be companies improving their real property as they re-tool and re-focus their business.
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Whether buying, selling, or improving property, businesses should know that most states impose a real estate transfer tax that, if applicable, can affect the costs of a transaction. Thirty-nine states and the District of Columbia impose some form of real estate transfer tax. The trigger for the tax is almost always a transfer of title. But there are many other circumstances that result in tax such as capital acquisitions, indirect transfers of ownership, financing and leases. There are simply many real estate scenarios that may give rise to tax liability, even in scenarios where ultimate ownership may not change, or may not change very much. For those financing or refinancing mortgages, it should be noted that some states impose a mortgage recordation tax that is separate from the real estate transfer tax.
As businesses consider the appropriate approach to a transfer of real estate, they should know that in some states the tax liability is imposed on the transferor or seller. Other states impose the burden on the transferee or buyer. States also provide many exemptions and exclusions from tax, such as transfers to the government or certain reorganization, but not all states share the same exemption provisions.
Real estate transfer taxes are imposed on the value of the property being transferred. Rates vary widely throughout the United States from 0.1% to over 4%. Additionally, several states authorize local option real estate transfer taxes. Thus, total state and local real estate transfer taxes can add considerable costs to the purchase or sale of real property.
The RSM State and Local Tax group can assist companies in navigating the complicated nationwide landscape of real estate transfer taxes. Depending on the state, the tax is significant. Businesses need to know whether particular transactions, such as change in ownership, might trigger liability. As noted, renegotiating a lease, or increasing a mortgage might lead to increased tax liability. Planning ahead and understanding the impact of real estate transfer taxes can ultimately save money and result in tax efficient transactions.