Documentary Stamp Tax: The Legislature Strikes Back

For a long time, people in Florida have been arguing about whether a tax should apply when someone sells a piece of land to a company they own. In 2005, the Florida Supreme Court said no, but then in 2009 the state changed the law to make it apply in some cases. This caused problems for people trying to figure out how much the land was worth for taxes. In 2007, the state also made a new rule that says property appraisers need to be told when a company that owns land changes owners. Florida charges a tax when property is transferred by a deed, at a rate of 70 cents for every $100 of the sale price. The tax applies even if the full sale price is not shown on the deed. In the Crescent case, a company transferred a building to a subsidiary for $10 and “other valuable consideration,” and paid tax on the full value of the property. The person who paid the tax asked for their money back, but the government said no. They went to court, and the judge ruled in favor of the government. The person appealed, but the appeals court also said the government was right. The Florida Supreme Court said that a tax didn’t apply to a property transfer because there was no payment or buyer involved. After the court’s decision, people started structuring property sales to avoid the tax. For example, instead of directly selling a property, someone could transfer it to a company they own, then sell the company to the buyer. This way, they could avoid paying the tax. The court’s decision basically got rid of the tax for a lot of property sales. Because of the Crescent decision, it can be hard for property appraisers to figure out the value of Florida real estate. This is because the decision allows companies to sell their membership interest instead of the property itself, making it tricky for appraisers to know when the property has been sold. When real estate is sold, its value is assessed for tax purposes. In 2009, the Florida Legislature changed the law to prevent people from avoiding paying taxes by transferring ownership to a company instead of selling the property directly. They clarified that if you sell the ownership of a company that owns property within three years of transferring the property to the company, you still have to pay taxes on it. The amendment to the law says that if someone transfers property to a new company and then sells part of that company within three years, they have to pay a tax on the sale. This makes it less attractive to use a company to sell property. This is because the person buying the company would have to take on any problems with the property, like environmental issues or accidents. So, it’s likely that people will just sell the property by itself instead of using a company. The statute has three exceptions from the stamp tax on the transfer of ownership interests in conduit entities within three years of transferring real property to them. First, if there’s no consideration for a gift of an ownership interest, it’s not taxed. Second, if shares in a conduit entity are traded on public exchanges, the transfer is not taxed. Lastly, transferring an interest in a conduit entity to a specific kind of trust for estate planning purposes is also not taxed. An irrevocable grantor trust is often used in estate planning to hold assets so they aren’t taxed in the grantor’s estate, but are still treated as owned by the grantor for income tax purposes. It’s sometimes called an “intentionally defective grantor trust.” The grantor can either give assets to the trust or sell them to the trust. The legislation also addresses trust conversions and mergers, ensuring that the sale of conduit entities is not avoided. In 2007, Florida made a law that says if you own property that isn’t your home and you sell it or if someone else takes control of it, you have to tell the property appraiser right away. If you don’t, the appraiser can increase the property’s taxes for 10 years and you have to pay extra money. This rule helps the appraiser know about property sales so they can set the right taxes. It’s important for anyone buying or selling property to follow these rules to avoid extra costs. This article discusses changes to Florida’s real estate transfer tax. It covers a case called Crescent and new laws passed in 2009. The authors are experts in tax law.

Source: https://www.floridabar.org/the-florida-bar-journal/documentary-stamp-tax-the-legislature-strikes-back/