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State and Local Real
Property Transfer Taxes

Purchasers and sellers of American land and buildings must consider the effects of state and local real property transfer taxes. These taxes can lead to substantial liabilities. Further, the taxes can apply to sales of entities, including non-American entities, that own real property. This is demonstrated by a New York case involving an Israeli citizen who owned and operated a trust from Tel Aviv. The trust sold its interest in a Netherlands Antilles limited liability company that in turn owned a hotel in New York City. The taxpayer argued that the sale was of intangible property having no New York connection. That argument was rejected, and the transfer was held to be subject to New York State taxes on the transfer of New York real property — at a total tax liability of $1.5 million. Further, while the decision addresses only New York State taxes, New York City’s real property transfer tax also likely applied.

Many states and cities impose taxes on the sale or other transfers of land and buildings located within their borders. When they apply, these taxes are imposed at rates of 1%, 2% or more of the property’s gross sales price.

      Taxes Apply to Many Types of Transactions
The taxes apply to direct sales of land and buildings. In addition, the taxes sometimes apply to transfers of interests in entities that own real property. For example, following a recent statutory amendment, the Chicago real estate transfer tax is imposed on transfers of controlling interests in entities that own real property comprising more than 75 percent of the fair market value of all of the entity’s assets.

The taxes are sometimes triggered by reorganizations of entities. For example, the Wisconsin Court of Appeals held that a transfer of real property from a limited partnership to its wholly owned limited liability company was taxable. It reached this conclusion even though for federal and Wisconsin income tax purposes the transfer was almost certainly disregarded and even though there was no change in the ownership of the partnership, what frequently is referred to as the property’s “beneficial ownership”. The Wisconsin court ruled that a tax exemption for transfers between “related” parties applied only to transfers involving natural persons. In addition, the court upheld the Wisconsin Department of Revenue’s imposition of penalties on the parties for failing to report the taxable transaction.


  Understanding the Statutes/Planning Opportunities
Taxpayers should invest the resources necessary to understand the potentially applicable real property transfer taxes. In part, this is because not all jurisdictions tax transfers of entity interests. And, where a jurisdiction does not tax such transfers, taxpayers may be well advised to transfer the interests in the entity holding the property instead of transferring the property directly.

For example, until recently Illinois cities were not permitted to tax transfers of entity interests. The significance of that restriction came to light in a case where a village attempted to impose its real property transfer tax on the sale of an entity that owned, through several tiers of entities, a large shopping center. The taxpayers contended that the village lacked the authority to impose the tax. A court agreed and ruled the relevant tax ordinance invalid.1

As another example, both New York State and New York City exempt transfers of real property occurring through transfers of entity interests if, after looking through all intervening levels of entities, the ultimate beneficial ownership of the property is unchanged. This is, of course, the opposite of the result in Wisconsin. As stated above, knowing whether transactions are taxable obviously is essential to proper tax planning and to properly pricing a transaction.

This Alert provides an introduction to American state and local income taxes. For further information and assistance with state and local tax issues anywhere in the United States, please contact David A. Fruchtman at 04-629-0520 or 312-281-1111.

      1 The author was counsel to the taxpayer in this case. After the decision was final,the village and other Illinois municipalities succeeded in having Illinois law amended to allow for the imposition of taxes on transfers of entity interests.


Previous issues of the State Tax Alert Newsletter are available at:

  *David A. Fruchtman is an attorney in the United States. He is not admitted to the Israeli Bar. He is Of Counsel to Horwood Marcus & Berk Chartered, located at 180 N. LaSalle Street, Suite 3700, Chicago, Illinois 60601. He is a Harvard Law School graduate and is chairman of the American Bar Association’s Income and Franchise Taxes subcommittee. He has been named by his peers as one of Chicago’s Leading Tax Lawyers. Horwood Marcus & Berk Chartered has one of the largest state and local tax law practices in the United States. The firm provides tax planning advice to clients of all sizes and has successfully represented clients before courts and administrative tribunals throughout the country, including at the United States Supreme Court.  
  This Alert is for discussion purposes only and does not constitute tax advice; consequently, it is not subject to the attorney-client privilege and does not constitute attorney work product. This Alert may be disclosed to any and all persons, without limitation of any kind, including any potential tax treatment or tax structure of any transaction described hereon. This Alert does not provide federal tax advice and was not prepared in a form to comply with the requirements of an opinion upon which a taxpayer can rely to avoid certain penalties under the Internal Revenue Code of 1986, as amended. No fee was received in connection with producing this Alert. © 2006 David A. Fruchtman