In the 2007 General Assembly, both
the House and Senate considered proposals to impose recordation
and transfer tax obligations on the transfer of controlling
interests in certain entities owning real property
(corporations, partnerships, limited liability companies,
limited liability partnerships and certain other unincorporated
businesses). The only practical difference between HB 475 and SB
616 was the threshold value of real property held by the
transferor entity to be subject to the taxes. The House version
was to apply to property valued in excess of $1,000,000.00 and
the Senate version to property exceeding $500,000.00 in value.
Similar bills have been introduced in recent years with a
variety of proposals to use the newly generated funds for
educational purposes and land preservation.
Robert J. Strupp, Esq.
Director of Research and Policy
As a practical matter, under current law, real property can be
transferred without payment of transfer and recordation taxes,
or documented recordation in the land records, by transferring
the ownership (controlling) interest in the title owner of the
property. Studies by the Maryland Department of Legislative
Services (2005 Session HB1) suggests that, at the threshold of 1
million dollars, the State would collect in excess of 13 million
dollars a year and the counties and municipalities would collect
in excess of 45 million dollars in additional transfer and
recordation taxes. In the current climate of budget deficits and
proposed tax increases, to paraphrase the late US Senator
Everett Dirksen, this is “real money”.
The so-called “llc loophole” does more than enable the sale of
high rise office towers of Baltimore City, the shopping centers
of suburbia and apartment complexes around the State to escape
transfer and recordation taxes, it enables investors who buy and
sell single family residential property through limited
liability entities to not only escape the transfer and
recordation taxes, but to escape the detection of land records.
Consider the following:
1. A owns 123 Maple Street
2. A creates a limited liability company wholly owned by A –
known as 123 Maple, LLC and records a deed from A to 123 Maple,
LLC. This transaction, under current law may be exempt from
transfer and recordation taxes.
3. A sells his membership interest in 123 Maple, LLC to B for
$20,000.00 cash. B now effectively owns 123 Maple Street.
Because this was a transfer of the LLC and not the property,
there are no transfer or recordation taxes and no deed
reflecting the sale.
4. B, a “wholesaler” real estate investor sells the membership
interest in 123 LLC to C, a rehabber for $40,000.00. Once again
there is no change in the title (123 Maple LLC retains
ownership) and no transfer or recordation taxes are collected.
5. C fixes the property, and thereafter 123 Maple, LLC deeds the
property to D for $100,000.00. Only in this last transaction is
a deed filed and transfer and recordation taxes collected.
What does the chain to title look like. A to 123 Maple, LLC to
D. What was lost in revenues in state and local transfer and
recordation taxes? Assuming the combined transfer tax to be 2
percent, $1,200.00 was not collected. Assuming a $5.00 per
$500.00 recordation tax, another $600.00 was lost, for a total
of $1,800.00. Suppose B and C have 10 transactions like this per
year, $18,000.00 in revenue, failed to be captured. If there
were merely 100 such transactions made statewide in a year,
$1,800,000.00 was lost by tax collectors.
As you can sense, the existing law results in the loss of
millions of dollars in possible tax collections when real
property is transferred by conveying it under the guise of a
membership interest or other entity interest. The critical
question is whether conveyance taxes are beneficial to State and
local governments and their citizens?