Buyers and sellers of real property anticipate some tax consequences from a real estate transaction, but typically these concerns are limited to federal income tax implications. The reality is that most states impose various taxes that could affect the cost of the entire transaction, and they are either not considered or understood. One of these taxes is the real property transfer tax. Because transfer tax is imposed by the state (and some counties and cities) on the transfer of title of real property from one person (or entity) to another person (or entity) within the applicable jurisdiction, these types of taxes can result in a material amount of liability. Real estate transactions can be complex enough without tax considerations and consequences, and transfer taxes are different in every jurisdiction in the country.
This Insight aims to break down what a sophisticated commercial real estate buyer and seller should be aware of when it comes to Florida’s daunting (and often misunderstood) real estate transfer tax known as the documentary stamp tax.
What is Florida’s Documentary Stamp Tax?
Documentary stamp tax on its face may sound confusing, but to understand this form of transfer tax, one must simply break down the two-prong definition: (1) the tax imposed on the document that transfers an interest in real property, (2) when there is consideration paid, or to be paid, for the transfer.
The documentary stamp tax rate is $0.70 for every $100 of consideration (or portion thereof). If the purchase price for real property is $500,000, a buyer and seller should anticipate $3,500 due at closing for documentary stamp taxes. Note, the only exception for this rate is Miami-Dade County where the rate is $0.60 per $100 (or portion thereof) of consideration for a single-family residence, and if the property is anything other than a single-family, the rate is $.06 plus $.45 surtax per $100 (or portion thereof).[1]
Because documentary stamp tax is set by the state government, it is standard practice in Florida for the seller to cover these costs, but it is not set in stone. Each party should make sure any purchase and sale agreement entered into explicitly states who will be the responsible party for such tax.
Was an Interest in Real Property Transferred?
A document that transfers an interest in real property can take many forms outside of a warranty deed or a special warranty deed, which are the instruments most commonly used for the transfer of real property. The Florida Department of Revenue provides a list of documents that transfer an interest in real property and is subject to transfer tax, including: quit claim deeds; contracts for timber, gas, oil, or mineral rights; easements; contracts or agreements for deed; deeds in lieu of foreclosure; an instrument conveying an ownership in a condominium unit; an installment contract, and assignments of leasehold interests and assignments of beneficial interests in a trust.[2]
Do not fear, renting an apartment in the Sunshine State is not subject to any transfer tax. To avoid any confusion, the Florida Department of Revenue provides a clear list of specific conveyances that are not subject to transfer tax. This list includes corrective deeds recorded to correct an error or deficiency on a previous deed on which a tax has already been paid, and leases of real property if the only consideration given to the landlord is the tenant’s promise to pay rent, among other limited exceptions.
Was There Consideration?
“Consideration” is not limited to money, and there does not need to be a formal exchange of cash or a wire of money for the Florida Department of Revenue to consider a conveyance of real estate subject to transfer tax.
For example, if Uncle Jack gifts a real estate investment to his nephew for free, and the property is free and clear of any mortgage or financing, then the deed reflects “nominal consideration”, and $0.70 tax is due.
Now let’s change the facts and say when Uncle Jack gifts his real property to his nephew, there is an underlying mortgage equaling $100,000. In this scenario $700 tax is due (100,000/100 x $.70 = $700), as Florida considers the transferee’s “undertaking of the mortgage” as the consideration, even if the property is a gift.
Here is an example involving commercial real estate: Company Z, which owns Property in Broward County with a fair market value of $2 million, transfers the Property to Subsidiary A. At the time of the transfer, the property has an underlying mortgage in the amount of $3 million, and the property is secured by a line of credit with an outstanding balance of $700,000. There is no consideration for the transfer to Subsidiary A, so the documentary stamp tax is calculated on the total $3.7 million (the mortgage plus the line of credit).
Florida law gives some examples of consideration (money, the discharge of an obligation, mortgages or other liens encumbering the property, exchange of property, and any other monetary consideration which has value), but this list is not inclusive, and should not be relied upon exclusively.[3]
What About Documentary Stamp Tax, Real Property and Conduit Entities?
Generally, when real property located in Florida is transferred from one subsidiary to another subsidiary by a commonly owned holding company (both subsidiaries in Florida are referred to as “conduit entities” under law), there is no documentary stamp tax due on the transaction (unless of course there is an underlying mortgage).
For example: Conduit A and Conduit B are both 100% owned by Holding Company Y. Conduit A transfers real property to Conduit B. Documentary stamp taxes aren’t due on this transfer because both Conduit A and Conduit B are wholly owned by Holding Company Y.
However, investors eyeing a short-term period of ownership must be aware that Florida has concluded if real property is conveyed to a conduit entity, and then all or a portion of that conduit entity’s membership is subsequently transferred within a 3-year period after the real property conveyance, documentary stamp taxes are imposed on the transfer of equity interests. The tax due is imposed on the consideration paid or given in exchange for the equity interests in the conduit entity at a rate of $.70 for each $100 of the consideration paid.[4]
Changing the facts above, Conduit A and Conduit B are still both 100% owned by Holding Company Y. Conduit A transfers real property to Conduit B. Holding Company Y then sells the equity interests in Conduit B to a third party only 2 years and 8 months from the transfer between Conduit A and Conduit B. Transfer tax would then be due on the sale of equity interests in Conduit B.
Is There Any Way to Avoid Documentary Stamp Tax?
If your transaction satisfies the two-part test identified above, the chances of avoiding documentary stamp taxes are slim. However, there are ways, depending on the structure and unique facts of a particular transaction, that documentary stamp taxes can be (potentially) reduced. Investors in real property in Florida should make sure their attorney is well versed in this area of local law when structuring complex transactions that may involve the transfer of real estate.
——————————————————————–
This DarrowEverett Insight should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This Insight is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. We are working diligently to remain well informed and up to date on information and advisements as they become available. As such, please reach out to us if you need help addressing any of the issues discussed in this Insight, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.
Unless expressly provided, this Insight does not constitute written tax advice as described in 31 C.F.R. §10, et seq. and is not intended or written by us to be used and/or relied on as written tax advice for any purpose including, without limitation, the marketing of any transaction addressed herein. Any U.S. federal tax advice rendered by DarrowEverett LLP shall be conspicuously labeled as such, shall include a discussion of all relevant facts and circumstances, as well as of any representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) upon which we rely, applicable to transactions discussed therein in compliance with 31 C.F.R. §10.37, shall relate the applicable law and authorities to the facts, and shall set forth any applicable limits on the use of such advice.
[1] https://floridarevenue.com/Forms_library/current/gt800014.pdf
[2] https://floridarevenue.com/Forms_library/current/gt800014.pdf
[3] https://floridarevenue.com/Forms_library/current/gt800014.pdf
[4] Florida Statutes, Section 201.02(3)
