If you’ve bought or transferred an interest in real property in the Granite State, you’ve likely encountered the Real Estate Transfer Tax (RETT). It imposes a tax of $1.50 for every $100 of value of the property being transferred. If the property is worth big money, as is often the case in the business context, that $1.50 piles up fast. But how exactly does the real estate transfer tax interact with Limited Liability Companies—now the most commonly formed business entity in this state? The answer, as is often the case in the law, is “it depends.”
The Real Estate Transfer Tax is “imposed upon the sale, granting and transfer of real estate and any interest therein including transfers by operation of law.” Since only “sales, grants, and transfers” of real estate are taxable under the RETT it’s important to know how the statute defines those terms. To constitute a “sale, grant, or transfer,” there essentially has to be a “bargained-for exchange,” i.e. a quid-pro-quo/you-scratch-my-back-I-scratch-yours sort of situation. The tax also does not apply when the property is gifted, i.e. done with a “donative intent,” where there is an actual handing off of the deed, and there is “an immediate relinquishment of control” by the person handing over the property.
Back in 2010, the New Hampshire Supreme Court decided the case of First Berkshire Business Trust v. Commissioner, New Hampshire Department of Revenue Administration, in which it interpreted the RETT to apply to transfers between a member of an LLC and the LLC itself (for those uninitiated to the world of LLCs, members are the LLC equivalent of shareholders, they pay a capital contribution for a “membership interest” which is similar to shares in a corporation). There, the member was a business that needed to put its real estate holdings into an LLC to get favorable financing to drag itself out of bankruptcy. The business transferred the property to the LLC for $10 and didn’t pay the tax. The business was then faced with an even better financing opportunity and transferred the real estate owned by the LLC to a newly formed LLC, again for $10 and again without paying the transfer tax. The State tried to collect the RETT, and the Supreme Court ultimately heard the appeal. It determined that, even though the transfers were between the owner of one LLC and the LLCs, there was still a “transfer” triggering the RETT. It reasoned that the payment of the $10 was a “bargained for exchange” between legally distinct business entities and that it did not matter that there was, in essence, common ownership amongst all the parties—they had to pay.
After First Berkshire, later decisions may have opened the door for ways for LLCs to avoid the real estate transfer tax. In 68 Technology Drive v. State of New Hampshire Department of Revenue Administration, the Hillsborough County Superior Court found that the RETT was not triggered when a member of an LLC transferred his interest in a sports complex to an LLC that he was the sole member (owner) of for no compensation. The court found that this transfer was a not a tax exempt “gift” since he never actually relinquished control because, as the sole member, he was still free to—more or less—treat the property as he had when he owned it as an individual. The court went on to say, however, that the RETT was not triggered at all because there was no “bargained-for” exchange, since no money was exchanged and no other benefit was given to the member in exchange for the property. It should be noted that 68 Technology Drive has limited value as precedent because it was an un-appealed decision of the Superior Court. It can be cited, however, to persuade a Trial Court that its reasoning and results should be followed.
Just two years after First Berkshire, the New Hampshire Supreme Court again addressed the issue of the real estate transfer tax in Say Pease IV, LLC v. New Hampshire Department of Revenue Administration. The gist of that dispute was that Say Pease was the managing member (the owner that managed the day-to-day operations of the business) of a real estate holding company called TIG. TIG wanted to get beneficial financing, and had to have its member (owners) take on a certain business form to get it. For that reason, the members of Say Pease formed Say Pease IV and transferred Say Pease’s interest (shares) in TIG to Say Pease, IV, and Say Pease, IV became the managing member of TIG. The problem was, despite transferring interests in a real estate company, no one paid the RETT, and the resulting dispute ended up with the Supreme Court.
Similar to the 68 Technology Drive decision, the New Hampshire Supreme Court held that the RETT was not triggered because there was no “bargained-for exchange.” It reasoned that Say Pease did not receive any compensation from Say Pease, IV when it transferred it membership interest in TIG, and without that exchange of benefits there was no triggering of the RETT. The Court went on to say that that despite the change of ownership regarding TIG—a company whose sole purpose was holding real estate— the property owned by TIG never changed hands. The Court also distinguished the First Berkshire decision, stating that Say Pease “received no benefit from the transaction;” unlike the business in First Berkshire, who, as you recall, was able to drag itself out of bankruptcy. The only benefit obtained through this web of business restructuring was TIG’s ability to obtain favorable financing terms—Say Pease as a separate and distinct entity received nothing. Therefore, no RETT was owed, and the Say Peases of the world sailed off into the metaphorical sunset.
Finally, in Z B.H. Realty, LLC v. Commissioner, New Hampshire Department of Revenue Administration, which predates First Berkshire, Husband and Wife were the members (owners) of an LLC where the Husband was the managing-member. Husband transferred a parcel of property he owned to the LLC without receiving any money or any additional membership interest (shares) in the LLC. After the State tried to impose a RETT on the transfer, the Cheshire County Superior Court found that the transfer was exempted since it was a gift. The Court noted that there was “donative intent” since Husband did not seek consideration and that there was actual delivery of the deed. The Superior Court also noted that there was a “relinquishment of control,” despite Husband being the managing-member of the LLC, because Husband transferred the property to an LLC in which he shared ownership with his wife, which limited his control of the property because, as a managing member, he had special duties to his wife. Since the transfer was a gift, the transfer was exempt from RETT. Like with 68 Technology Drive, this case was only a Superior Court decision and is not binding precedent; it can only be used to persuade trial courts.
These three cases demonstrate that under special circumstances and in carefully structured transactions, a conveyance of real estate from a member to an LLC may avoid triggering RETT. Avoiding First Berkshire will likely mean that the conveyance cannot have a direct benefit upon the member transferring the property to the LLC, either by virtue of favorable financing opportunities of the transferring member, relief from a loan obligation, or through monetary consideration.
Moreover, using 68 TD and ZBH Realty as a guide (which, again, has limited value as precedent since they are trial court decisions), a transfer to an LLC for no compensation and no increased membership interest (shares) may be characterized as lacking a “bargained-for exchange” or may qualify as a gift. The former is particularly useful in the context of a single member LLC, in which the single member still likely controls the property without a duty to any other members, but has still not received any consideration for the conveyance of real property. The latter approach, as was used in ZBH Realty, is particularly useful where a member, even a managing-member, transfers title to real estate to an LLC in which there are other members and fiduciary duties have not been substantially limited. So long as no money or benefit changes hands, the transfer may qualify as a gift that is exempt under RETT. It should be noted, however, that any attempt to use the value of the real estate as a capital contribution to obtain a membership interest in an LLC would likely be viewed as a “bargained-for” exchange, which would trigger the RETT. Therefore, ensuring that the conveyance is a transfer outright with no benefits flowing to the member is of critical importance, which unfortunately narrows the benefits flowing from 68 TD and ZBH Realty.
For more information about real estate transfers between business entities, contact Attorneys Denise Poulos or Eric Maher.