Did transferring unencumbered fee-simple property from tenants in common to their wholly owned LLC trigger value-based documentary stamp tax?

Plain-English summary

Florida ruled that only minimum documentary stamp tax applied when tenants in common transferred unencumbered fee-simple real property to their wholly owned LLC.

The land was subject to a ground lease, and the tenant had mortgaged its own improvements. But the owners were not liable on that debt, and the mortgage did not encumber their fee-simple property. The fee title therefore remained unencumbered.

Minimum tax depended on continuity of beneficial ownership: the property owners also had to own the recipient LLC, and each person's percentage in the LLC after transfer had to be identical to that person's percentage in the property before transfer. The recorded instrument also had to reflect nominal consideration.

The TAA warned that if a grantor's ownership interest in the LLC were transferred for consideration within three years, the post-July-1-2009 entity-interest rule could impose tax on that later transaction.

What this means for you

Review both the fee estate and separate leasehold interests. A tenant's encumbrance does not necessarily burden the owner's fee, but ownership percentages and near-term equity transfers require exact documentation.

Common questions

Did the tenant's leasehold mortgage count as a fee-title encumbrance? No.

What ownership condition applied? Each owner's LLC percentage had to match the prior property percentage.

Citations and references

• Fla. Stat. § 201.02(1), as quoted and discussed in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 09B4-008

Original ruling text

SUMMARY
QUESTION: Whether documentary stamp tax is due in connection with the proposed transfer of
unencumbered fee simple real property to the LLC
ANSWER: Only minimum tax is required provided each Taxpayer holds the same percentage
(%) of interest in the LLC after the transfer as held in the unencumbered property prior to the
transfer of the property to the LLC.

November 10, 2009

Re:

Technical Assistance Advisement No. 09B4-008
Documentary Stamp Tax-Transfer of fee simple real property
Section 201.02(1), Florida Statutes (F.S.)
XXX,, XXX and XXX (hereinafter “Taxpayers”)

Dear :
Your letter, dated XXX, requesting a Technical Assistance Advisement has been referred to this
office for response. The specific scenario for which advice has been requested is summarized
below.
Facts as Presented by Petitioner
The prior title holder of certain real property entered into a XXX year Ground Lease with a Tenant.
The Ground Lease originally covered XXX phases of real property owned by the prior title holder.
A portion of the fee simple real property was sold in XXX. The remaining fee simple real property
is now owned by the Taxpayers as tenants in common.
The Ground Lease Tenant owns improvements made to real property and has encumbered its
interest in the property with a leasehold mortgage. However, the Taxpayers are not obligated on the
mortgage nor is the fee simple real property encumbered by the leasehold or any other mortgage on
the property.
The Taxpayers desire to transfer the fee simple real property to their wholly-owned limited liability
company (“LLC”).

Request for Advisement
You request an advisement that documentary stamp tax is not due in connection with the
proposed transfer of fee simple real property to the LLC.
Provisions of Law and Discussion
Section 201.02(1), Florida Statutes (F.S.), imposes tax on deeds that convey real property or any
interest in real property at $.70 per $100, or portion thereof of the consideration for the
conveyance. For purposes of this section, consideration includes, but is not limited to: money
paid or to be paid, the amount of any mortgage, or other encumbrance on the property conveyed,
whether or not the underlying indebtedness is assumed.
The mortgage does not encumber the fee simple real property but only the real property
improvements owned by the Tenant under the Ground Lease. Therefore, the fee simple real
property is unencumbered at the time of the deed.
In Kuro Inc. v. Department of Revenue, 713 So. 2nd 1021 (Fla. 2nd DCA 1998), the Florida real
property was transferred from two individuals to their wholly-owned corporation. The court
ruled documentary stamp tax as imposed under s. 201.02(1), F.S., was not due on the deed
transferring unencumbered Florida real property. The court stated that the beneficial ownership
of the real property was unchanged and that there was no "purchaser" within the meaning of s.
201.02(1), F.S., and therefore, no tax was due.
In Crescent Miami Center, LLC v. Dep't of Revenue, 903 So 2d 913 (Fla. 2005), the Florida
Supreme Court stated that "...the transfer of property between a grantor and its wholly owned
grantee, absent any exchange of value, is without consideration or a purchaser and thus not
subject to documentary stamp tax in section 201.02(1)." This ruling, generally, allows entities
that own directly or indirectly 100% of another entity to transfer unencumbered property without
consideration to the other entity without tax being due.
As a result of the above referenced rulings, the Department has taken the position that only
minimum documentary stamp tax is due when the following conditions exist and the recorded
instrument reflects nominal consideration.
1) The owner(s) of the real property are also the owner(s) of the entity to whom the real property
is being conveyed. This ownership may be direct or indirect through a chain of ownership.
2) The percentage of ownership in the real property being conveyed and the percentage of
ownership in the entity or entities must be identical before and after the transfer of the real
property.
3) There are no encumbrances or liens on/against the real property at the time of conveyance.

Position of the Department
Accordingly, the deed transferring the unencumbered fee simple real property from the
Taxpayers to their LLC will only require minimum tax, provided each Taxpayer holds the same
percentage (%) of interest in the LLC after the transfer as held in the property prior to the
transfer of the property to the LLC.
Please note that effective July 1, 2009, s. 201.02(1)(b), F.S., provides when real property is
transferred to an entity without tax, and all or a portion of the grantor’s ownership interest in the
entity is subsequently transferred for consideration within 3 years of such transfer, tax is
imposed on the transfer of an interest in the entity at $.70 for each $100 or fraction thereof of the
consideration paid or given in exchange for the ownership interest in the entity.
This response constitutes a Technical Assistance Advisement under s. 213.22, F.S., which is
binding on the Department only under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is predicated on those facts and the
specific situation summarized above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the statutes or rules upon which this
advice is based may subject similar future transactions to a different treatment than expressed in
this response.
You are further advised that this response, your request and related backup documents are public
records under Chapter 119, F.S., and are subject to disclosure to the public under the conditions
of s. 213.22, F.S. Confidential information must be deleted before public disclosure. In an effort
to protect confidentiality, we request you provide the undersigned with an edited copy of your
request for Technical Assistance Advisement, the backup material and this response, deleting
names, addresses and any other details which might lead to identification of the taxpayer. Your
response should be received by the Department within 15 days of the date of this letter.
Sincerely,

Celestine Grantham Turner
Tax Law Specialist
Technical Assistance and Dispute Resolution

CG/mh
Record ID#: 63511