Bulletin: MD2016001

Dear Associates:

As a general rule, Maryland imposes transfer and recordation taxes when real property is bought and sold. These taxes are typically calculated on the sales price of the property, and are collected when a deed is recorded. State transfer taxes usually amount to 0.5% of the purchase price; state recordation taxes vary by jurisdiction, and range from $5.00 to $12.00 per $1,000.00 of the purchase price.  

Example: Transfer and recordation taxes on the sale of a $1,000,000.00 property in Frederick County, Maryland are $17,000.00 ($5,000.00 and $12,000.00, respectively). 

In the past, some buyers have sought to avoid the imposition of transfer and recordation taxes by taking title to real property in a business entity, then transferring ownership of the business entity to a new buyer. If no deed is recorded, no taxes are owed.

In an effort to prevent this, the Maryland legislature enacted MD Tax-Property § 12-117. Essentially, this statute short-circuits the possible “end run” set forth above by taxing the sale of a business entity if two conditions exist:

1. There is a transfer of a “controlling interest” in the business entity, which means > 80% of the stock of a corporation, or > 80% of the total interest of an LLC, partnership, trust, or other entity; and 

2. The business entity owns real property that equals at least 80% of its total value, and is worth at least $1,000,000.00.

Although there are some narrow ways around this statute, there were few viable options, until recently, to avoid imposition of a controlling interest tax. Of particular note was MD Tax-Property § 12-117(c)(4), which exempted transfers of controlling interests between a corporation and its subsidiaries. Section 12-117 (c)(4), however, did not include a provision for transfers between other kinds of related business entities, such as LLCs or partnerships. Where a corporation did not own the real estate, the application of MD Tax-Property § 12-117(c)(4) was unclear.

In response to legislation introduced as SB 597/HB 1226, Governor Hogan approved changes to MD Tax-Property § 12-117 on April 26, 2016, as follow: 

• References to transfers only between related corporate entities in § 12-117(c)(4) are deleted;
   
• New language has been added to the statute stating that recordation taxes are not imposed on the transfer of a controlling interest in a real property to any other real property entity that is owned, directly, or indirectly, by the same persons, and in the same proportions, as the persons who own, directly or indirectly, the transferor entity.*

In other words, the rules that once applied to corporations and their subsidiaries only, have been extended to all “real property entities”, as defined by the statute. That includes corporations, LLCs, partnerships, and others.

The new legislation, which becomes effective on July 1, 2016, is a relief for business entities of all kinds in Maryland that wish to transfer controlling interests between related companies.

* Note:  if no recordation tax is imposed under MD Tax-Property § 12-117, then no transfer taxes are charged under MD Tax-Property § 13-103(e). 

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