In the wake of the Crescent decision, which was published during one of the most active real estate markets in Florida’s history, practitioners began structuring sales of Florida real property to avoid the imposition of Florida documentary stamp tax.8 The benefit of this planning approach is illustrated by the following example: Assume seller S and purchaser P have entered into a purchase and sale contract with a purchase price of $5 million in connection with the sale of real estate. Rappoport & Glassman, Documentary Stamp Tax: The Legislature Strikes Back, 48 Fla. Bar. Cancellation of Indebtedness; Debt for Equity Exchange, Voluntary Worker Classification Settlement Program. 1 Bernard A. Barton, Jr., David P. Burke & Mitchell I. Horowitz, Kuro and Muben-Lamar in the Eye of the Beholder? the transfer was $30,000. On this point, the legislature stated: The Legislature recognizes that the Supreme Court’s opinion in Crescent is limited to the facts of the case and accepts the court’s interpretation of s. 201.02, Florida Statutes, that no consideration exists when owners of real property unencumbered by a mortgage convey an interest in such property to an artificial entity whose ownership is identical to the ownership of the real property before conveyance. Over the years the answer to this question has shifted from “no” to “yes” and back to “no” as Florida courts and the Florida Legislature interpreted and refined the concepts of “purchaser” and “consideration” for purposes of the deed tax.1 The most recent (and presumably final) answer to this question came in 2005, when the Florida Supreme Court held in Crescent Miami Center, LLC v. Florida Department of Revenue, 903 So. First, it maintains the integrity of the three-year period during which the documentary stamp tax applies to the sale of conduit entities. It is interesting to note that the example assumes that the transfer of the LLC interest by one co-owner to her wholly-owned corporation was not subject to documentary stamp taxes. For purposes of this section, consideration includes, but is not limited to, the money paid or agreed to be paid; the discharge of an obligation; and the amount of any mortgage, purchase money mortgage lien, or other encumbrance, whether or not the underlying indebtedness is assumed. The Florida Supreme Court held that the documentary stamp tax did not apply to the conveyance to CMC because the transaction lacked “consideration” and a “purchaser” as required by the statute. 2 Stephen G. Vogelsang and Adi Rappoport, Crescent — Did the Florida Supreme Court Effectively Repeal the Documentary Stamp Tax on Transfers of Real Estate? You should consult with your own attorney or other tax advisor before applying any of the content of this website to your individual situation. Deeds 2. Absent any documentary stamp tax planning, the sale of the real estate would generate a documentary stamp tax of $35,000. J. The second lesson is more taxpayer-favorable - that once documentary stamp taxes are paid on a transfer of interests of a conduit entity, successive transfers are not taxed. The tax rate for documents that transfer an interest in real property is $.70 per $100 (or portion thereof) of the total consideration paid, or to be paid, for the transfer. The Crescent decision resulted in the proliferation of transaction planning that avoided the imposition of the deed tax and caused a headache for property appraisers attempting to determine the valuation of Florida real property for ad valorem tax purposes.2 In response to the “abuse” of Crescent, the legislature amended §201.02 in 2009 to apply the Florida documentary stamp tax to the sale of ownership interests in an entity that owns Florida real property where such real property was conveyed to the entity within three years of sale.3 In addition, in 2007, the legislature enacted §193.1556 to require notice to property appraisers upon the change of control of certain entities owning Florida real estate. Estate planners often refer to these irrevocable grantor trusts as “intentionally defective grantor trusts.”. in taxation in 2008, both from the University of Florida College of Law. On July 10, 2009, Calvin and Sally sold their ownership interests in the LLC. 44 (Oct. 2005). Previous posts in this Blog discussed the recent Florida Supreme Court decision on the documentary stamp tax in the Crescent case. In addition to the payment of any increase in taxes during such 10-year period, the property owner would be required to pay interest at a 15 percent annual rate on such increase in taxes and a penalty of 50 percent of such increase in taxes.22. This makes it difficult for a county property appraiser to determine when the property has been sold. The Emergency Rule implements Chapter 2009-131, Laws of Florida, which imposes a documentary stamp tax at the rate of 70¢ per US$100 (or fraction thereof) on any transfer of an ownership interest in a so-called "conduit entity" when the transfer occurs within three years of a post-July 1, 2009 transfer of Florida real property into the conduit entity. The DOR concludes that the transfer of stock in the corporation which holds the LLC interests is subject to documentary stamps. Code R. 12B-4.014(2)(a) (2009). Under Florida law, E-mail addresses are public records. The notification requirement provides the property appraiser with information concerning the sale of real property through entities so that a property’s assessed value for property tax purposes are determined by taking into account recent transactions that change beneficial ownership. ~ From the Rules Regulating The Florida Bar, On deeds, instruments, or writings whereby any lands, tenements, or other real property, or any interest therein, shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or any other person by his or her direction, on each $100 of the consideration therefor the tax shall be 70 cents. in accounting, J.D., and LL.M. He is board certified by The Florida Bar in taxation. Mortgages, liens, and other evidences of indebtedness Regardless of where the deed or other document is signed and delivered, documentary stamp tax is due. Under the grantor trust provisions, a grantor is taxed on trust income if the grantor retains a reversionary interest whose value is initially greater than five percent of the value of the trust or specified rights to control beneficial enjoyment of the corpus or income or if the grantor retains or vests in a nonadverse party certain administrative powers. 8 Jeff Ostrowski, Critics Push to Plug Hole in Tax Loophole, Palm Beach Post, August 12, 2007. The 2007 Notice of Change of Control Legislation In 2007, the Florida Legislature enacted §193.1556, which requires any person or entity that owns nonhomestead real property to promptly notify the property appraiser of any change of ownership or control. Fla. St. § 201.02 provides:This provision essentially piggybacks on the Internal Revenue Code grantor trust rules by treating transfers to grantor trusts as nontaxable events. Instead, contact this office by phone or in writing. 2d 913 (Fla. 2005), interprets s. 201.02, Florida Statutes, in a manner that permits tax avoidance inconsistent with the intent of the Legislature at the time the statute was amended in 1990.”11. First, a gift of an ownership interest in a conduit entity is not subject to tax to the extent that there is no consideration.17 This exception is consistent with the general rule that the documentary stamp tax does not apply to gifts of unencumbered realty.18. Section 201.02 of the Florida Statutes governs certain transfers or conveyances that are subject to documentary stamp taxes. (The Miami-Dade County rate is $.60 on all documents plus $.45 surtax on documents transferring anything other than a single-family residence). DOCUMENTARY STAMP TAX: Add to MyFLRules Favorites: View Chapter: 12B-4. Florida imposes a documentary stamp tax of 70 cents ($1.00 in Miami-Dade) per $100 of the purchase consideration for the sale of real estate located in Florida. This includes when property is transferred from one spouse to another. The Legislature expressly rejects any application of the court’s interpretation where the facts are not comparable to the facts in Crescent. Florida’s Constitution prohibits a state income tax and would be very difficult to amend. A taxpayer cannot avoid the result by conveying Florida real property to a trust, which then converts or merges into a Florida entity. The potential liabilities associated with real property can be significant, including environmental exposure and premises liability. The Legislature expressly rejects any application of the court’s interpretation where the facts are not comparable to the facts in, . Outside of Miami-Dade County, the transfer tax rate is 70 cents per $100 of the deed's consideration. Documentary stamp tax (“doc stamps”) are important for Florida asset protection planning because this tax is potentially assessed whenever a person conveys property titled in his individual name into an asset protection entity wholly owned by the same transferor. S and P end up in the same exact place, except that the documentary stamp tax has been avoided. Following up on the previous example, in certain instances, there would be no need for P to dissolve S LLC, where the real estate is a commercial property. Otherwise, property must be inspected every five years.9 If a membership interest in a limited liability company is sold instead of the underlying real estate, the property could conceivably escape reassessment for a number of years following the transfer of the membership interest, because a new deed would not be recorded upon such transfer. Does the Florida documentary stamp tax on deeds (the deed tax) apply to the conveyance of unencumbered Florida real property from a grantor to a wholly owned entity? Secondly, this provision likely eliminates the ability to avoid documentary stamp tax by conveying Florida real property to an out-of-state business trust, which then merges into a Florida entity. He earned his B.S. The stated purpose of the transfer was to segregate the property in order to … The stated purpose of the transfer was to segregate the property in order to facilitate future unsecured financing. When real property is sold, the property is typically assessed the following January 1 in part based on the recorded sales price. Documentary stamp taxes are due on the transfer of 50% of the LLC interests to the second person. in taxation at the University of Florida. The American Influence on International Commercial Arbitration: Doctrinal Developments and Discovery Methods. (Note: the doc stamp rate is $.70 per $100 for all Florida counties except Miami-Dade where the rate is $.60 per $100. The tax is imposed on a tax base equal to the consideration given for the transfer, rounded up to the nearest $100. in combination with transfers of ownership of, or distributions from, artificial entities. Documentary Stamp Tax at $.70 per $100, rounded up, based on the total purchase price. The deed was recorded, and CMC paid $1,212,750 in documentary stamp tax, which was comprised of the state documentary stamp tax and a Dade County documentary surtax. Despite its long history, the Documentary Stamp Tax has continued to receive updates and shows no signs of being repealed in the future. The initial transfer of unencumbered real estate to the LLC as a capital contribution was not subject to documentary stamp taxes under, Effective July 1, 2009, the “drop-and-transfer” strategy was eliminated. Both parties moved for summary judgment in the circuit court, and final summary judgment was entered in favor of the DOR. Conclusion The 2007 and 2009 statutory revisions described in this article create new requirements and issues for Florida practitioners that deal with the conveyance of Florida real estate. Under. One of the sellers subsequently transfers her LLC interests to a corporation that she owns. Florida imposes a transfer tax on the transfer of real property in Florida. Under the example, two sellers transfer the real estate into an LLC. She later sells the interests in the corporation which holds her interests in the underlying LLC. The Florida documentary stamp tax applies to transfers of interests in Florida LLCs which hold real estate acquired on or after July 1, 2009 if the real estate was acquired by the LLC without the payment of documentary stamp taxes. 2009-131, §4. Documentary stamp taxes did not apply to the transfer of the LLC interests. Documents subject to the tax include: 1. The law is effective where the first transfer to a “conduit entity” occurred after July 1, 2009. The rate is equal to 70 cents per $100 of the deed's consideration. Generally, the grantor will either make an outright gift to such trust or make a small “seed” gift to the trust followed by a larger sale. The conveyance or merger would start the three-year clock running. Documentary stamp taxes are calculated at a rate of 70 cents for each $100 of consideration. Lessons. Finally, the amendment to §201.02 provides that a transfer for purposes of estate planning by a natural person of an interest in a conduit entity to an irrevocable grantor trust as described in subpart E of part I of subchapter J of chapter 1 of subtitle A of the United States Internal Revenue Code is not subject to documentary stamp tax.20 There is no requirement that the transfer to such irrevocable grantor trusts be without consideration. If the consideration paid or given in exchange for real property or any interest therein includes property other than money, it is presumed that the consideration is equal to the fair market value of the real property or interest therein, The Legislature recognizes that the Supreme Court’s opinion in, is limited to the facts of the case and accepts the court’s interpretation of s. 201.02, Florida Statutes, that no consideration exists when owners of real property unencumbered by a mortgage convey an interest in such property to an artificial entity whose ownership is identical to the ownership of the real property before conveyance. Florida imposes a documentary stamp tax of 70 cents ($1.00 in Miami-Dade) per $100 of the purchase consideration for the sale of real estate located in Florida. Deeds and other documents that transfer an interest in Florida real property are subject to documentary stamp tax. While the legislature voiced its endorsement of the opinion issued by the Third District Court of Appeal in Crescent, which the legislature stated interpreted §201.02 in a manner that prevented tax avoidance, it also stated that it does not intend to overturn the Florida Supreme Court’s decision in Crescent with respect to the conveyance of unencumbered Florida real property to artificial entities. 3 2009 Fla. Laws Ch. 10 The Florida Legislature’s response is discussed later in this article. The deed stated that CMC paid $10 and “other good and valuable consideration” for the property. This example illustrates how the application of Crescent effectively repealed the documentary stamp tax for a significant number of real estate transactions. Second, the transfer of shares or similar equity interests in a conduit entity which are dealt in or traded on public, regulated security exchanges or markets is not subject to tax.19 This provision apparently contemplates a conveyance of real property to a conduit entity, which becomes a public company within three years of transfer. — The 10-cent tax increase in the documentary stamp tax levied by s. 2, chapter 92-317, does not apply to deeds and other taxable instruments relating to real property located in any county that has implemented the provisions of chapter 83-220, Laws of Florida, as amended by chapters 84-270, 86-152, and 89-252, Laws of Florida. Calculations. After paying the tax, the transferee filed for a refund of the documentary stamp tax. For example, on real estate being purchased for $1 million, the … Daniel J. Glassman is an associate in the Tax Practice Group at Gunster, Yoakley & Stewart, P.A. For over half a century, Florida tax practitioners have struggled to answer a relatively simple question. However, the subsequent sale of the ownership interest in such entity within three years of the conveyance of the Florida real property would be subject to the documentary stamp tax. This website is optimized for use on a PC using Microsoft Internet Explorer. According to the court, there was no consideration or purchaser with respect to the transfer of the property to CMC, since “nothing was exchanged by CMC for the grant of property from [the transferor]; [and] thus, there was no consideration or purchaser in the transaction, just a ‘mere change in form of the stockholder’s equity in the corporation.’”5 Furthermore, the court stated “[t]he argument that the increase in the value of [the transferor’s] interest in CMC constituted consideration is not persuasive, as this increased interest resulted from the transfer and was not the consideration for making the transfer.”6 The Florida Supreme Court quashed the Third District Court of Appeal’s decision and remanded the case to the district court for further consideration consistent with the Florida Supreme Court’s opinion.7. In such case, the documentary stamp tax would not apply to the grantor’s sale of ownership interests in such public company. The State of Florida has preserved a unique, arguably antiquated stream of revenue since 1931. The documentary stamp tax, sometimes called transfer tax, is assessed on the amount of the consideration paid for the transfer of any interest in real property located in Florida. Irrevocable grantor trusts are frequently used in estate planning to create a vehicle that holds assets that are not included in the grantor’s estate for estate tax purposes, but treated as owned by the grantor for income tax purposes. However, if the second person later sells her LLC interests to a third person, no documentary stamp taxes are due on the transfer to the third person, since documentary stamp taxes were paid on the transfer to the second person. The treatment of a merger or conversion as a conveyance potentially accomplishes two goals. The amendment to the statute accomplishes this result by creating the concept of a “conduit entity,” which is defined as a legal entity to which real property is conveyed without full consideration by a grantor who owns a direct or indirect interest in the entity, or a successor entity.13 The term “full consideration” means the consideration that would be paid in an arm’s length transaction between unrelated parties.14, The amended statute provides that when real property is conveyed to a conduit entity and all or a portion of the grantor’s direct or indirect ownership interest in the conduit entity is subsequently transferred for consideration within three years of such conveyance, then tax is imposed on each such transfer of a conduit entity interest for consideration at the rate of $.70 for each $100 or fraction thereof of the consideration paid or given in exchange for the ownership interest in the conduit entity.15, When an ownership interest is transferred in a conduit entity that owns assets other than the real property conveyed to the conduit entity, the tax is prorated on the percentage the value of such real property represents of the total value of all assets owned by the conduit entity.16. The Documentary Stamp Tax also applies to documents executed or delivered in the state of Florida. Prior to July 1, 2009, sellers of unencumbered Florida real estate were able to avoid the documentary stamp tax by first transferring the real estate to a limited liability company wholly-owned by the sellers, then transferring the LLC interests to the buyer. The documentary stamps are determined based upon the proportion of the corporation’s value which reflects the indirect interest in the real estate through the LLC. Center, LLC v. Florida Department of Revenue, holding that when unencumbered property is transferred from the owner to a wholly owned legal entity – such as a limited liability company or wholly owned partnership - it is not subject to the Florida documentary stamp tax. There are a few exceptions to the 2009 Documentary Stamp Tax law, including an exception for transfers to grantor trusts. In general, documentary stamp taxes are: Determined based on the consideration given for the transfer. Thereafter, it is conceivable that in the future P would sell its membership interest in S LLC and that this pattern would continue for all future sales. 18 Fla. Admin. Adi Rappoport is a shareholder of Gunster, Yoakley & Stewart, P.A., residing in the firm’s West Palm Beach office. ‘To inculcate in its members the principles of duty and service to the public, to improve the administration of justice, and to advance the science of jurisprudence.’
Thus, a potential buyer would be hesitant to acquire interests in an entity that was funded with real estate and has been operating for more than three years. . As an initial matter, it is difficult to properly define “a transfer for purposes of estate planning,” as estate planning itself is an extremely broad concept. In acquiring the ownership interests of an entity, the buyer assumes all known and unknown liabilities of the entity. The documentary stamp tax as applied to deeds conveying real property is set out in section 201.02(1), Florida Statutes (2003), which states: A documentary stamp tax will be due on the deed transferring the property in an amount equal to $1,400 ($200,000/100 x .70). All rights reserved. The fed- eral government imposed a documentary stamp tax on transfers of real property deeds until the tax was re- pealed in 1967. The grantor either gratuitously transfers assets to such trusts or sells assets to such trusts. For example, on real estate being purchased for $1 million, the documentary stamp taxes are $7,000 (or $10,000 in Miami-Dade). A change of ownership or control generally means any sale, foreclosure, transfer of legal title or beneficial title in equity to any person, or the cumulative transfer of control or of more than 50 percent of the ownership of the legal entity that owned the property when it was most recently assessed at just value.21 The change of ownership is reported on Form DR-430, Notice of Change of Ownership or Control Non-Homestead Property, by the owner to the property appraiser in the county where the property is located. The Florida Documentary Stamp is a tax levied in Florida on documents that transfer a property interest in Florida. The County Clerk collects this tax when the document transferring property is recorded. No attorney-client relationship is established through the use of this site or any e-mail or other communication to the author. The statute explicitly excludes the following transfers: Where the transfer of LLC interests is 3 years or more from the date that the real estate was contributed to the LLC; Where the transfer of conduit entity interests is a gift; Where the conduit entity is publicly traded; Where the conduit entity is transferred, as part of the estate planning of the grantor, to an irrevocable grantor trust. Florida documentary tax stamp rates are the same in each county, with the exception of Miami-Dade. Instead, it objects to the concept that ownership interests in entities may be conveyed without the imposition of a Florida documentary stamp tax. Moved for summary judgment in the future Barton, Jr., David P. Burke & Mitchell I. Horowitz, and... Start the three-year holding period transferring the interest in Florida real property deeds until the Practice. 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