Transfer of Interests in Real Property Entities Soon to be Subject to Tax in Maryland

For decades, owners of real property located in Maryland have been able to avoid transfer and recordation taxes on the property's sale by selling interests in the entity that owned the real property, rather than directly selling the real property itself. But the Maryland legislature, by enacting into law the Maryland Tax Reform Act of 2007, will be closing that loophole shortly.

The act revises Title 12 and 13 of the Maryland Property Tax Code to impose transfer and recordation taxes on each transfer of a "controlling interest" in a "real property entity," as if the real property were conveyed by deed. The new transfer and recordation taxes apply to all transfers of controlling interests completed after June 30, 2008. Unless exempt, the real property entity is required to pay the tax to the Maryland State Department of Assessments and Taxation within 30 days of the transfer of a controlling interest.

Transfer of a "controlling interest" entails the sale of more than 80% of the total value of all classes of stock of a corporation, the beneficial interest of a trust, or the total interest in capital and profits of any other entity (such as a limited partnership or limited liability company) to the extent that the applicable corporation, trust or other entity constitutes a "real property entity."

A "real property entity" is any entity that beneficially owns real property located in Maryland if the Maryland real property constitutes at least 80% of the value of the entity’s assets, and the aggregate value of the Maryland real property is equal to or exceeds $1,000,000. When valuing the real property, no reduction is given for the amount of any mortgage, deed of trust, lien or other encumbrance.

There are a handful of notable exemptions to the new transfer and recordation taxes. Transfer and recordation taxes are not imposed on the transfer of a controlling interest in a real property entity if (a) the transfer would otherwise be exempt from recordation tax if the real property were transferred between the parties by deed, (b) the transferee and the transferor are owned by the same persons and in the same proportions, (c) the transfer of a controlling interest is completed in stages over a period of more than 12 months, or (d) the transfer of a controlling interest, though it may take place in stages over a period of less than twelve months, is not effected pursuant to an intentional plan or contract to do so. In addition, although the parameters are not entirely clear, the act exempts transfers of controlling interests in real property entities between certain commonly controlled entities, though the availability and applicability of this exemption may be somewhat limited.

If an entity does not quality for an exemption, then the entity itself (not the transferor or transferee) is liable for the transfer and recordation tax. The tax liability is calculated as a percentage (ranging from 1.16% to 3.00%, depending upon the county) of the "consideration payable" for the transfer of the controlling interest. In calculating the consideration payable, the entity must add to the amount of actual consideration paid by the transferee(s) all debts owed by the real property entity, including all mortgages, deeds of trust, or other liens against its real property. It may subtract the amount of all assets of the entity other than its Maryland real property.

(This entry published by Chris Iavarone and Kevin Pigott, members of the Real Estate Development group)

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