Documentary transfer taxes are something any small business owner needs to consider when making real estate decisions for the business. A new California court decision shows that the state’s documentary transfer tax may be applied in situations where some people did not initially anticipate it would be applied.
What are Documentary Transfer Taxes?
Simplified, documentary transfer taxes are taxes levied on the documents related to real estate transfers. In California, the board of supervisors of any county or combination of a county and city can impose these taxes on deeds or other writings that transfer real estate so long as the value of the interest in the property being transferred is at least $100. The tax authorized by the state is 55 cents for each $500 of value.
What Happened in this New Case?
The new case, which was decided by California’s second appellate district, is 926 North Ardmore Avenue, LLC, v. County of Los Angeles. The case started because Gloria Averbrook was the beneficiary of some trusts that owned an apartment building. Her sons were the trustees. The sons established an LLC to hold the apartment building. They then transferred the building to the LLC, and then transferred the LLC to a trust owned LLP. Through subsequent transactions, the family then sold most of their ownership of the LLP to trusts Gloria had established for her sons, the trustees of the original trusts. As required, the LLC reported these changes in ownership. Then, the County Recorder sent a notice demanding that the LLC pay a documentary transfer tax. The LLC paid, but filed a claim seeking a refund. It argued that the sale of the LLP did not qualify to be taxed because it did not count as being “realty sold.” The case eventually found its way to the appellate court.
What Does this New Court Case Mean for Documentary Transfer Taxes in California?
In it’s decision, the Court relied on the California Revenue and Taxation Code, which is the law that permits the imposition of documentary transfer taxes when there is realty sold. The Court decided that when an LLC reports a change in ownership, realty is sold if the LLC’s parent partnership and the LLC owned real property. So in those cases, the tax can be collected. In making this decision, the Court wrote that if it decided otherwise, then property owners could avoid paying these taxes by conveying their property to a single entity LLC and then selling that LLC to the third party. What this means is that if you intend to transfer the ownership of an entity like an LLC, and there is real property involved, you will want to speak with a real estate attorney first to be sure that you are aware of this sort of tax implication.