This may be surprising to some, if not counter-intuitive, but sixteen states impose a real estate transfer tax when a controlling interest in a legal entity is transferred.  See the table below.   The real estate transfer tax triggered by these so-called “controlling interest” transfers do not require a change of name, the recordation of a new deed, a bill of sale, or payment of an allocated purchase price.  The mere transfer of a controlling interest is sufficient, although the company directly affected by the transfer (ultimate parent or intermediate parent or the entity holding title to the real estate) as well as the form of entity (corporation, LLC or partnership) can be relevant, depending on the applicable state law.  It is the law of the state or local jurisdiction where the real estate is located that applies, not the law of the jurisdiction of incorporation of the legal entity or the transferee.  The tax rate ranges from 0.1% to as high as 5%, depending on the state.  In some states the transfer tax is not large, assuming the tax is paid in a timely manner.  As with all taxes, late payment can result in significant interest and penalties.

This topic is difficult to discuss in a general way because there are several issues involved and few states treat all those issues in the same way.  For example, some states provide an exemption from the transfer tax for intra-group transfers (e.g., New York, Connecticut and Washington) provided that the ultimate parent remains the same.  Other states have no such exemption, which means that an internal corporate reorganization could result in a real estate transfer tax in one or more jurisdictions.  Similarly, the definition of “controlling interest” varies from state to state.  Many states define a “controlling interest” as more than 50% but other states have a higher threshold.  New Hampshire does not even define “controlling interest”, which can make it challenging to assess the applicability of the law in some circumstances.

Six states and the District of Columbia limit the application of their controlling interest real estate transfer tax to “real estate entities” but, again, the definition of a “real estate entity” varies from one jurisdiction to the next.  Typically, they use an asset test or income test (or both) that compares the percentage of real estate assets against total assets, or income from real estate activities against total income.  A ratio above a specified threshold indicates a real estate entity.  However, an important point of difference among jurisdictions is whether the assets or income are limited to real estate in the state where the tax is imposed or whether the test is applied to all real estate assets or income, wherever located, on a consolidated basis.

Another issue is the valuation against which the transfer tax rate is applied.  If the purchase price is paid to acquire shares (or some other entity-level ownership interest), what is the value of the transferred real estate for purposes of the transfer tax?  This question of value is quite ambiguous in several state laws.  Generally, there is a reference to either fair market value or the appraised value (for property tax purposes) when no part of the purchase price is allocated to specific real estate in the purchase agreement, but this issue is seldom addressed as clearly as one might expect it to be.

Two other issues to consider are the level at which the transfer occurs and the treatment of a transfer of publicly traded shares.  Again, states differ.  Some states look at the transfer of the entity holding title to the real estate, while others include transfers of a controlling interest in a corporate parent, whether the ultimate parent or an intermediary company.  Most states provide an exemption for sales of publicly traded shares, but the exemption applies only to the sales of such shares, not the sale of a subsidiary that holds real estate in a state where the transfer tax applies.

As the foregoing discussion shows, it is hard to generalize about controlling interest real estate transfer taxes.  However, one general statement can be made:  It is important to check the laws of each state where real estate is located when planning any sale of a company or a large (50% or greater) interest in a company.

The states below impose real estate transfer taxes.  Sixteen have a “controlling interest” transfer tax.   Note that only state laws are listed below.  There may be transfer taxes imposed by counties, municipalities or other political subdivisions.  In addition, this chart is likely to change as more states discover this source of additional tax revenue.

The Corporation Secretary