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Bar News - April 6, 2007


Real Estate Law: Avoiding the NH Transfer Tax Trap

By:

 

The Real Estate Transfer Tax can be a trap for the unwary, especially for out-of-state counsel. The New Hampshire Real Estate Transfer Tax (transfer tax) originally applied only when a deed of real estate or an interest in real estate was recorded. However, the scope of this tax has been expanded over time.

 

Chapter 78-B of the New Hampshire Revised Statutes Annotated (RSA) establishes and governs the transfer tax. The NH Dept. of Revenue Administration (DRA) has enacted REV 800, rules which interpret and implement the statute. The transfer tax applies to transfers of any interest in real estate that are not specifically exempted under the statute. Both the buyer and the seller must pay the transfer tax, which is assessed to each party at the rate of seventy-five cents per $100 of consideration. If the consideration paid is $4,000 or less, each party must pay a minimum transfer tax of $20. The parties could contractually assign payment of the entire transfer tax to one party, but such allocation is not customary.

 

The parties must report the transfer tax to the DRA on Form CD-57, “Declaration of Consideration,” which is paid to the Register of Deeds when the deed is recorded.

 

Statutory Exemptions

 

Of the transfers specifically exempted from the transfer tax under RSA 78-B:2, these are the ones typically encountered (see statute for full list):

  • Transfer of title to the state, or a subdivision of the state, such as a town or city (As REV 802.03(b) interprets this provision, a private seller deeding to the state or housing authorities is also exempt and this interpretation in practice has been extended to deeds to municipalities).
  • Transfer of title from the state, or a subdivision of the state (the seller is exempt but not the buyer).
  • Transfer of title to or from the United States, or a subdivision of the United States (the United States is exempt, but not the other party mortgages).
  • Mortgages, mortgage discharges, corrective deeds, and tax collector deeds.
  • Real property passing per terms of a will and by operation of law to a surviving joint tenant.
  • Non-contractual transfers (must satisfy the elements of a gift, i.e., donative intent, actual delivery, and immediate relinquishment of control).

 

The DRA provides relief from the transfer tax for two additional types of transfers. First, certain transfers into and out of a revocable grantor trust are only subject to the minimum transfer tax. However, a sale of real estate held in trust by a trustee to a third party is subject to the full transfer tax. Second, almost all leases are exempt from the transfer tax; only those with a term 99 years or greater are subject to the tax.

 

Penalties and Interest

 

Anyone who “falsely states in writing” upon any deed to be recorded or upon the Declaration of Consideration that no transfer tax is required, or who indicates consideration less than the actual price or consideration, is subject to a penalty of 100 percent of the amount of additional taxes determined to be due, plus interest accrued from the original due date.

 

2006 Amendments

 

Since 1997, the transfer tax has applied to transfers of interests in real estate holding companies that hold New Hampshire real estate. In transfers of such interests, the transfer tax is assessed on the fair market value of the real estate holdings. The transfer tax is reported on Form CD-57HC, “Real Estate Transfer Tax Declaration of Consideration for Real Estate Holding Companies,” available on the DRA’s Web site (http://www.nh.gov/revenue/forms/rettforms.htm). This form is filed with, and transfer tax directly paid to, DRA.

 

In July 2006, the Legislature expanded the scope of the transfer tax with respect to real estate holding companies. The transfer tax now also applies to “[t]ransfers of interests in an entity that holds, either directly or indirectly, an interest in a real estate holding company to the extent of the ownership interest of the entity in the real estate holding company.” (RSA 78-B:1-a, V, as amended by 2006 N.H. Laws chapter 149). This change makes the transfer tax applicable to “upper tier” ownership transfers.

 

The amendments also modified the definition of real estate holding company. “Real estate holding company” is now defined as a business organization engaged principally in the business of owning, holding, selling or leasing real estate, and which owns real estate or an interest in real estate in New Hampshire. Prior to these amendments, a real estate holding company was defined as a business entity in the business of holding, selling or leasing real estate that either (a) derived more than 50 percent if its gross receipts from the ownership or disposition of real estate; or (b) held real estate, the fair market value of which comprised more than 50 percent of the fair market value of its assets.

 

  • Example 1: LLC #1 owns a shopping mall in New Hampshire and derives its income principally from leasing mall space. Although LLC #1 holds only one asset, it is a real estate holding company, as its principal business is owning and leasing real estate. A transfer of an interest in LLC #1 is subject to the transfer tax.
  • Example 2: A professional corporation organized by a group of radiologists owns the office building used by their medical practice. Since the professional corporation’s principal business is the radiology practice, the professional corporation is not a real estate holding company. Transfers of an interest in the professional corporation among the doctor owners or to new owners would not be subject to the transfer tax.
  • Example 3: Same facts as in Example 1. LLC #2 and LLC #3 each own 50 percent of LLC #1 and hold no other assets. LLC #2 sells its ownership interest in LLC #1 to John Doe. Both LLC #2, as seller, and John Doe, as buyer, must pay the transfer tax on the transfer of the ownership interest in LLC #1, because it is a real estate holding company. According to REV 805.01, the transfer tax is computed based upon 50 percent of the fair market value of the shopping mall. No deed will be recorded, since there is no transfer of real estate. In this example, perhaps the purchase price actually paid by John Doe for the purchase of a 50 percent ownership interest in LLC #1 should be the basis for calculating the transfer tax, not 50 percent of underlying fair market value. The buyer of a 50 percent tenant in common interest in real estate will normally pay less than one-half of the fair market value of the entire parcel, since control is shared.
  • Example 4: Instead of the transfer in Example 3, Jane Doe purchases all of the ownership interests of LLC #2 and LLC #3 in LLC #1. Indirectly, Jane Doe is taking control of the shopping mall wholly owned by LLC #1. LLC # 2 and LLC# 3, as sellers, and Jane Doe, as buyer, must each pay the transfer tax based on the full fair market value of the shopping mall. Prior to July 1, 2006, this type of transfer was probably not made taxable by the terms of the statute, except for sham transactions.
  • Example 5: Instead of the transfer in Example 4, Jane Doe purchases only LLC #2’s ownership interest in LLC #1. Both LLC #2, as seller, and Jane Doe, as buyer, must pay the transfer tax. The transfer tax is computed based upon 50 percent of the fair market value of the shopping mall held by LLC #1 according to DRA, but perhaps should be based on actual consideration paid.

 

 

DRA proposed changes to REV 800 were withdrawn on Nov. 20, 2006. If a publicly traded REIT (real estate investment trust) has a New Hampshire real estate holding company as a subsidiary, transfers of publicly traded ownership interests in the REIT since July 1, 2006 have been within the literal scope of the transfer tax, although most owners of such shares would have no taxable “nexus” with New Hampshire.

 

Broad Interpretation

 

The DRA has interpreted the transfer tax to apply to the transfer of real estate from one business entity to another business entity even if no consideration is paid and even if there is no change in ownership, such as a reorganization or conversion of business form. Based on published Declaratory Rulings, the DRA’s position appears to be that a transfer tax is due merely for the privilege of changing form of ownership, unless the transaction is expressly exempt. For statutory conversions of an existing entity to another form with no change of ownership interests, this position may go beyond the statute’s reach.

 

Chapter 78-B imposes the transfer tax on “the sale, granting and transfer of real estate” including transfers by operation of law. The sale, grant or transfer of real estate or an interest in real estate is presumed taxable unless specifically exempted. (RSA 78-B:1.) The phrase “sale, granting and transfer” is defined as a “contractual transfer of real estate or any interest in real estate….” (RSA 78-B:1-a,V.) The term “contractual transfer” is in turn defined as a “bargained-for exchange of all transfers of real estate or an interest therein. . . .” (RSA 78-B:1-a, II.) Although “bargained-for exchange” is not statutorily defined, the statute provides a non-exclusive list of examples of “contractual transfers.” These examples include transfers of real estate or an interest in real estate from any entity (corporation, partnership or other) to the owners of that entity and vice versa.

 

The transfer tax is computed based on the “price or consideration” for a “sale, grant or transfer” of an interest in real estate. The term “price or consideration” is defined as the amount of money or other property and services given in exchange for real estate. The statute requires that, in contractual transfers where the property exchanged includes the “surrender of rights,” the consideration shall be no less than the fair market value of the real estate or interest in real estate, as determined by the DRA. A shareholder’s surrender of shares pursuant to a corporate liquidation is one example of a “surrender of rights” contemplated under the statute.

 

Based on these statutory provisions, DRA may be exceeding its statutory authority by imposing the transfer tax on certain entity conversions. The case for no transfer tax appears to be strongest in the case of the conversion of a corporation into a limited liability company, or vice versa, with no change of ownership. Between 1994 and 2001, entity conversions with no change of ownership were expressly exempt from the transfer tax. Does repeal of the exemption define the reach of the statute, or was the “conversion exemption” superfluous?

 

When a corporation converts to a limited liability company without any change of ownership, the limited liability company receives any real estate of the corporation by operation of law, and the corporate shares of the owners become membership interests. Arguably, there is no “bargained-for exchange,” which is part of the definition of “contractual transfer.” And if there is no “contractual transfer,” there is no “sale, granting, and transfer” that would be subject to the transfer tax. Furthermore, one could argue that there is no “price or consideration” in such a conversion. The limited liability company, which is the “transferee” of the real estate, does not surrender any “rights.”

 

In the likely rare cases of a limited partnership converting to general partnership and a general partnership converting to a limited liability company, with no change in ownership, New Hampshire’s Uniform Partnership Act expressly supports no application of the transfer tax to either conversion. (RSA 304-A:58.)

 

Unless a party is prepared for possible litigation with DRA, in dealing with any statutory conversion of an entity which is a real estate holding company to another entity, the least costly way of proceeding may be either to pay the transfer tax based on the fair market value of the real estate holding in connection with the entity conversion (reporting and paying the tax directly to DRA) or to forgo the conversion.

 

R. Carl Anderson is an attorney with Sulloway & Hollis in Concord, whose practice areas includes real estate and tax, trusts and estates. Attorney Kelly Ovitt Puc, also of the Sulloway firm, contributed to this article.

 

 

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