Improvements to the Real Estate Transfer Tax

The New Hampshire Legislation made two improvements to the Real Estate Transfer Tax during its 2016 session. Before these improvements, the real estate transfer tax applied to transfers of real estate from individuals to an entity owned by the same individuals. It also applied to transfers between commonly owned entities, including transfers required by lenders willing to lend to and receive a mortgage back only from a “bankruptcy remote” entity.

Under the prior law, the owner of a vacation home located in New Hampshire who desired to convey the home to a limited liability company for no payment could not do so, without paying a “deemed” real estate transfer tax equal to 1.5% of the fair market value of the vacation home. In order to avoid payment of this transfer tax “toll,” many individuals have continued to hold real estate individually, rather than conveying the real estate to a limited liability company, even though ownership through a limited liability company was preferable.

Since June 21, 2016, individual owners of real estate who desire to transfer their real estate to an entity owned by them in the same proportions may do so without paying any real estate transfer tax for the deed into the new entity. Thus, owners of vacation homes desiring to use a limited liability company for protection against personal liability and to set forth rules for how future generations of the family may own and use the vacation home may now use that planning option without payment of any transfer tax.

The prior “transfer tax” toll has also deterred general partners of older general partnerships holding real estate from transferring the real estate to a limited liability company in order to eliminate personal liability as a general partner. The partners of general partnerships holding real estate may now take advantage of ownership of the real estate as members of a limited liability company, instead of as general partners of a general partnership, without payment of any deemed transfer tax, so long as the ownership proportions remain the same.

Owners of business properties seeking to refinance mortgages against the real estate often encounter a lender requirement that the real estate be held in a “single purpose” entity with governing provisions intended to lessen the likelihood of any bankruptcy reorganization. In many instances, the transfer of real estate from one entity to another “bankruptcy remote” entity, made in order to meet lender requirements, have under the prior law required the payment of a real estate transfer tax equal to 1.5% of the fair market value of the property transferred, even though no dollars changed hands between the two entities and ownership of each entity remained the same. Such transfers can now be made without payment of any transfer tax “toll.” Transfers of real estate carried out solely to fulfill the requirement of a lender to provide financing or refinancing are no longer taxable transfers under the new law.

The real estate transfer tax remains a unique and somewhat complicated tax, which is not easy to understand. However, at least two of its worst provisions have now been eliminated.

R. Carl Anderson