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Thursday, June 26, 2008

CHANGES IN OWNERSHIP IN ENTITIES THAT OWN REAL ESTATE NOW MUST BE REPORTED [FLORIDA]

The assessed value of real property is typically adjusted by the county tax appraisers upon a sale of real estate, based on the amount paid for the real estate. However, if the real estate is owned by an entity, such as a corporation, LLC, or partnership, and it is the ownership interests in the entity that are sold (and not the real estate itself), the property appraiser typically has no notice of the sale or the price involved, and thus no valuation adjustment based on the sale usually occurs. As sale of interests in entities becomes more popular as a method of avoiding documentary stamp taxes, the problem of lack of notice to the tax appraiser has become worse.

Under recent changes to Florida law that became effective this month, an entity owning real estate must now report the sale of interests in the entity to the property appraiser. For this purpose, the reporting is triggered by a transfer of control of the entity or more than 50% of the interests in the entity (with exceptions for transfers between legal and equitable title and transfers between husband and wife or due to dissolution of a marriage). The reporting is not limited to "sales" of interests in entities - any transfer of control is subject to reporting.

The penalties for not reporting can be significant. For failing to report, the owner will be penalized for taxes avoided by such failure for up to 10 years, 15% interest on that amount each year, and a further penalty of 50% of the taxes avoided. Such penalty will become a lien against the subject real property, or if no longer owned, other real property of the owner owned in Florida.

Until the Department of Revenue issues Rules under the new law, the method of reporting and the forms to be used are unknown. Further, the statute is unclear as to who exactly must do the reporting. It appears that it is the entity that owns the real property that must report and that bears the penalty if reporting does not occur. Other issues that will hopefully be resolved include how to determine control and changes in control when interests in an entity are owned by other entities, how the rules will apply when interests in an entity that own the entity that owns the real estate are disposed of (that is, how the rules will apply to multi-tiered ownership structures), whether transfers that do not reflect typical sale transactions (such as transfers of interests in corporate reorganizations) will need to be reported, how the consideration on the sale will be allocated to the underlying real estate if the entity owns other assets or has liabilities, and how reporting will occur if the consideration received for the ownership interests is not based on cash consideration.

While at first glance it appears that the reporting requirement is not that big a deal, it is likely to present substantial administrative headaches for taxpayers and property assessors alike. There is also likely to be a substantial amount of unintended noncompliance, since many taxpayers and nonreal estate attorneys will likely not be aware of the need for reporting simply because of transfers of interests in entities.

Fla.Stats. §193.1556.

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