November 16, 2020
When a person or entity purchases real estate in New York State a deed is recorded in the county clerk’s office of the county in which the property is located evidencing the conveyance of the real estate. In order to record the deed the purchaser must also submit a New York State Real Estate Transfer Tax Return (TP-584) and New York State Real Property Transfer Report (RP-5217) to the county clerk. The RP-5217 recites the full sale price of the transaction and is subsequently provided to the tax assessor of the municipality in which the property is located. In the event that the sale price reported on the RP-5217 exceeds the current assessed value of the property, it is very possible that the tax assessor may increase the assessed value of the property causing an increase in the amount of real estate taxes due on the property.
If the real estate to be purchased is owned by a limited liability company or by a corporation it is possible to avoid completing the RP-5217 by purchasing the membership interests of a limited liability company or the stock of a corporation versus purchasing the underlying real estate itself. By purchasing membership interests or stock, real estate purchasers are able to take title to real estate without needing to record a deed in the local county clerk’s office. In light of the fact that a deed is not recorded, the RP-5217 is not submitted to the county clerk and the tax assessor is not provided with notice of the sale price in a transaction. Consequently, the assessed value of the property will most likely not change simply because there was a change in ownership of the property.
The fact that a purchaser may save on property taxes is certainly an advantage to purchasing membership interests or stock, however, there are potential disadvantages to purchasing membership interests or stock. First, and most significant, is that by purchasing the membership interest or stock, the purchaser is purchasing the asset or assets owned by the entity but also assuming any liabilities owed by the entity. Therefore, the purchaser will most likely need to perform more due diligence on the entity being purchased than the customary due diligence required in a traditional real estate transaction. Second, the purchaser should consult with their attorney or accountant as to whether purchasing membership interests or stock could create adverse income tax consequences related to the purchaser’s basis in the real estate or depreciation schedule going forward. Third, if the purchaser is using a lender, the non-traditional nature of the transaction could make it more difficult to obtain financing for the transaction. Finally, the additional due diligence required for this type of transaction will often create more costs and fees associated with the transaction.
In any event, purchasing the membership interests of a real estate owning limited liability company or the stock of a real estate owning corporation versus the underlying real estate itself may be an attractive option to certain real estate purchasers. It is an excellent option if the purchase of the real estate itself could trigger a large increase in the assessed value of the property and consequently a substantial increase in the property taxes.