Business owners frequently engage in real estate transactions. For example, business owners occasionally change their choice of entity, effectively transferring real estate from the original entity to the newly formed organization. Furthermore, business owners often transfer real estate in and out of an entity. Previously, these real estate transactions were subject to the New Hampshire real estate transfer tax. However, the New Hampshire Legislature recently passed a bill creating the opportunity for significant real estate transfer tax savings.
New Hampshire imposes a real estate transfer tax on the “sale, granting and transfer of real estate and any interest therein including transfers by operation of law.” All sales, grants and transfers of real estate are presumed to be taxable unless specifically exempt. On June 21, 2016, the New Hampshire Legislature passed a bill adding two additional exemptions to the real estate transfer tax.
First, the Legislature added an exemption for transfers of real estate occurring as a result of the change in the form of the organization if no consideration is exchanged, the assets and liabilities of the original and new entity remain the same and the owners and their respective shares of ownership are the same.
To illustrate how this exemption applies, assume we have hypothetical clients named the “Landowners.” Assume the Landowners run a business and own real estate in the name of Landowner Sales Corp., an S Corporation, but they want to convert the S Corporation to an LLC: Landowner Sales, LLC. That transaction would not be taxable under the new amendment to the statute, as long as no money was exchanged and the ownership of Landowner Sales Corp. is the same as the ownership of Landowner Sales, LLC.
Second, the legislature added an exemption for transfers of real estate between business owners and their respective entity, if no consideration is exchanged, the assets and liabilities of the parties remain the same except for the transferred real estate, and the owners’ respective shares of ownership remain the same. The transfer tax now applies only to transactions that would cause shifts in the proportionate ownership of an entity.
To illustrate how this exemption applies, assume that the “Landowners” set up a limited liability company (LLC) to hold their property. No transfer tax would be due because the exemption for transfers of real estate between business owners and their respective entity would apply to the transaction as long as the Landowners are the only members of the LLC. However, if the Landowners subsequently added their friends the Browns to the LLC as members, that transaction would be taxable. If the Browns and Landowners were members of an LLC and the Landowners conveyed their property into that LLC, the transaction would be taxable because the Browns, members of the LLC, would have rights to the property that they did not have before.
The new exemption is also beneficial for individuals looking to transfer their real estate into their revocable trusts. Using the same example as last month’s article, assume that Leila and Lou Landowner decide to set up a revocable trust in one or both of their names, for example: the Leila and Lou Landowner Revocable Family Trust of 2016, and decide to transfer their home to the new trust. Prior to the new exemption discussed above, the Landowners would have to pay the minimum $40 transfer tax because the State of New Hampshire regarded the transfer as a “contractual” transfer. The statute now provides that if the Landowners deed the property over to their revocable trust for “no consideration”, meaning no money is exchanged, then they do not owe any real estate transfer tax to the State of New Hampshire.
Additionally, as a result of a legislative amendment to the definition of “consideration,” transfers made solely to obtain financing/refinancing or the recitation of nominal consideration won’t trigger real estate transfer tax.
For example, if the Landowners own business property in the name of Landowner Sales, LLC, and want to refinance, but their bank requires a transfer of the real estate back to themselves individually in order to complete the refinance; then, as long as no money is exchanged for this transfer, it will be considered a “non-contractual transfer” and no transfer tax will be due. Even if the deed from Landowner Sales, LLC to the Landowners stated on its face: “$10” or “nominal consideration”, the transfer would be seen as a non-contractual transfer. This is because the statute amended the definition of consideration to declare that nominal consideration of $10 is not consideration, despite the fact that the New Hampshire DRA had taken the position that it was in disputes with taxpayers that reached the New Hampshire Supreme Court.
A real estate attorney can help you structure your transaction to utilize these new exemptions and minimize real estate transfer tax.