Conveyance tax?

I am in Connecticut, if this is relevant.

I own a piece of land. My business partner is a builder. What we are thinking is to form a LLC with the land as my contribution and his labor as his contribution. The goal is to build a house on the land and then sell it.

My questions are:

1) Is there a conveyance tax due when transferring the land to the LLC? 2) If so, is there a better arrangement to avoid this overhead?

We know we will have to pay the conveyance tax when selling the house to the actual buyer. But we just want to avoid any unnecessary tax in the due course.

Thanks.

Reply to
My interest
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"My interest" wrote

This is a question a real estate lawyer should be able to answer in a snap. There is always some form of recording fee at the courthouse at a minimum, and that can't be avoided. If there is a state transfer fee, it's there, you know what it is, so pay it.

Reply to
paulthomascpa

Recording fee etc is OK as they are small (less than $100?). But conveyance tax is expensive, thousands or even more depends as it's a percentage of the parcel value. So I am looking for advise from this forum.

Reply to
My interest

There may be an exemption in your situation, but I doubt it. You can call your county recorder's office and see what they say. But even if there is an exemption my guess is they'd be reluctant to tell you about it.

I agree with Paul - check with a local real estate lawyer.

In case there is a high transfer tax there may be a way for you to contribute the property without having to record the deed and pay the tax immediately. Check with the lawyer about that, too.

___ Stu

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Reply to
Stuart A. Bronstein

is to form a LLC with the land as my contribution and his labor as his contribution. The goal is to build a house on the land and then sell it.

actual buyer. But we just want to avoid any unnecessary tax in the due course.

I am not a real estate attorney nor do I reside in CT. That said, my interpreation of the CT law leads me to conclude that you would owe the conveyance tax. If you were the sole member of an LLC and transferred the property, no fee would be due as it is merely a change in identity and there would not be a chage in beneficial ownership. That is not the case here. There would be consideration upon the transfer with a beneficial change in ownership.

I recommend you discuss this with a real estate attorney as there appears to be various rulings and court cases in CT on this subject.

Reply to
Alan

Could OP contribute the land to an LLC of which he is the sole member, and then have that LLC merge with another LLC (of which his partner is the sole member)? Would that merger trigger a transfer tax?

Seth

Reply to
Seth

As I said... this issue has been adjudicated numerous times in CT. The tax is applied if there is a beneficial change in ownership. It sounds like that the second part of your scenario is a beneficial change in ownership. The t/p needs to discuss this issue with a professional versed in real estate tranfers.

Reply to
Alan

Surely the tax isn't triggered every time a share of stock of a corporation that owns land in CT is traded, so there must be some line in between those cases.

Seth

Reply to
Seth

Stock trades are not a change in benefical ownership of the property. The corporation, regardless who owns it, is still the owner of the property.

P.S. I'm done on this thread.

Reply to
Alan

I guess Seth may imply such a scenario: I quitclaim the land to a SMLLC that owned by me and then sell 50% stock of this LLC to my business partner. The first step will for sure not trigger a conveyance tax. And if we say the land is always owned by the LLC regardless of the stock trading, sounds like the second part will not trigger a tax either.

This seems to be a loophole because I can sell 100% of the stock to somebody else (so the LLC becomes his own SMLLC). Afterwards he can quitclaim back to him without paying the tax.

But I don't see anything wrong in Seth's logic. Maybe only stock trading on non-disregarded entity will avoid tax? ... not sure , it is an interesting point.

Reply to
Xing Zhou

In California this issue (in addition to the transfer tax part of it) has come up because the annual property tax is pretty much frozen until there is a change in ownership of property. The rule here for corporate owned property is that change in ownership of

50% of the stock in a corporation triggers change in ownership for property tax purposes.

On the other hand how they monitor or enforce it is something I don't know. It seems to me that it would be very difficult to do.

Stu

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Reply to
Stuart A. Bronstein

in Calif. under various circumstances change in beneficial ownership does indeed act as a change of ownership for the purposes of property tax reassessment.

Reply to
Reggie

The rule

Reply to
Reggie

If that's such a gross misstatement of the law, then exactly what is the rule?

The applicable statute says,

"When a corporation, partnership, limited liability company, other legal entity, or any other person obtains control through direct or indirect ownership or control of more than 50 percent of the voting stock of any corporation, or obtains a majority ownership interest in any partnership, limited liability company, or other legal entity through the purchase or transfer of corporate stock, partnership, or limited liability company interest, or ownership interests in other legal entities, including any purchase or transfer of 50 percent or less of the ownership interest through which control or a majority ownership interest is obtained, the purchase or transfer of that stock or other interest shall be a change of ownership of the real property owned by the corporation, partnership, limited liability company, or other legal entity in which the controlling interest is obtained." Rev. & Tax Code Section 64(c)(1).

___ Stu

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Reply to
Stuart A. Bronstein

I am traveling and do not have access to my files.

But you now show one statute which refers to a change in CONTROL. Before, you were more broadly stating "change in ownership of 50% of the stock in a corporation" which need not coincide with a change of control.

There is also the case where a cumulative 50% change in ownership in the shares effect a "change of ownership" for property tax purposes, but that only pertains to a situation where property is placed in an entity in a tax free manner, i.e. where the ownership interests of the entity match the ownership interests of the property just prior to its being placed in the entity.

Reply to
Reggie

^^^^^^^^^^^^^^^

If all of the shares of (e.g.) PG&E change hands 5 times, but at no time does anybody own more than 3% of the company, then the "change in ownership of 50% of the stock in a corporation" has happened (10 times), but the "obtains control" hasn't.

If initially, I own 100%, and I sell 10% to each of 8 different (independent) people, then the clause isn't triggered.

So, going back to the original issue: if the landowner contributes the land and some money (retaining 51% ownership) and the builder contributes goods and services to construct the building, then the tax isn't triggered. (The same would hold with 3 parties: landowner, builder, investor, provided that neither of the latter two obtained

50% ownership.)

Seth

Reply to
Seth

That is not correct in California. Since the pro rata interests in the land before the LLC formation, and the pro rata interest of the LLC are not the same, there is a "change of ownership" in the property for California property tax purposes.

Reply to
Reggie

Spelling it out:

(1) Land owner contributes the land to single-owner corporation. (2) Land owner sells 49% of the corporation to builder in exchange for building a house on it.

Which transaction, if either, generated the "change in ownership"?

The first would be "form over substance" if it did. The second does not, by the "obtains control" rule.

Seth

Reply to
Seth

yeah, you didn't spell it out for me, but as soon as I hit "send" I saw the flash. However, it would seem that if steps 1 and 2 were part of a single plan, the state would invoke the step doctrine. I don't know that for sure, but you know how they want the money. It would be different if the two steps were unrelated in time and planning.

Somebody must know how to do this. I was thinking maybe the contractor doesn't take an ownership interest, but takes some sort of debt load on the property based on the value of his input.

Reply to
Pico Rico

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