Florida has long been known as a tax friendly state for retirees. The "Sunshine State" has no income tax on individuals and no estate taxes. The state has quite a different reputation for commercial real estate investors who must deal with a variety of complex sales, transfer, mortgage, and property tax issues. These issues create a number of unanticipated bumps for potential commercial real estate investors. With proper consultation, negotiation, structure and planning, many of the impediments created by these issues may be reduced or eliminated. This article examines many of the Florida tax issues, which arise in connection with Florida real estate and related financing transactions.
Real Estate Transfer Tax
Florida imposes a transfer tax on the transfer of real property in Florida. The tax is called documentary stamp tax and is an excise tax on the deed or other instrument transferring the interest in real property. The tax is imposed on a tax base equal to the consideration given for the transfer, rounded up to the nearest $100. The rate is 0.7 percent in most of the state, but Miami-Dade County imposes a surtax making the overall rate 1.05 percent (0.6 percent in Miami Dade on single family residential properties). The grantor and grantee are both legally responsible for the payment of the tax. By custom, the seller normally pays, but ultimate responsibility is negotiable. The tax is normally paid when the instrument is recorded, but if not recorded, it is due by the 20th day of the month following the transfer.
Consideration is the amount being paid for the property and includes any debt which will remain on the property, whether or not assumed. When the consideration for the transfer of the property is something other than money, consideration is presumed to be equal to the fair market value of the property. Over the years, a number of special rules have developed for special cases.
- Exchange of property: Both deeds are taxable based upon the fair market value of the property described in that deed
- Defaulted mortgage: A deed in lieu of foreclosure is taxed based upon the amount of the debt extinguished, even when that amount exceeds the value of the property. In an actual foreclosure, the tax base is the bid amount.
- Trusts: The tax is based upon the value of the property multiplied by any change in beneficial ownership. A deed between revocable trusts and their grantors are not taxable
- Gifts: Tax is due only on the amount of debt encumbering the property
- Corrective deeds: No tax because there is no transfer of property
- Closely held entities: When entities have common ownership, tax is due based upon the amount of debt encumbering the property, plus that amount of the equity value that represents a change in the underlying beneficial ownership. If there is no debt or no change, there is no tax.
- Leases: The creation of a lease is not taxable, but the transfer of a leasehold interest is taxable based upon any consideration given
- Agent to principal: A deed from an agent to its principal, of real property acquired with the principal's funds is not subject to tax
The transfer of an interest in an entity that owns real property is not subject to this tax, but there are two important exceptions. First, the transfer of a beneficial interest in a land trust is taxable based upon the consideration given for the transfer. Second, the transfer of an interest in a conduit entity is taxable. An entity is considered to be a conduit entity for three years after the entity acquires property from an affiliate in a transaction not fully taxable pursuant to the rules for closely held entities.
Exemptions from the tax include certain transfers incident to divorce, transfers under a confirmed bankruptcy plan, and transfers pursuant to an eminent domain procedure.
The amount of transfer tax paid is stamped on the deed or other instrument being recorded. Deeds are public record and are often posted on a Property Appraiser's web site. By a bit of reverse engineering, the purchase price paid for the property can easily be determined by interested persons.
Advance knowledge of how and when this tax is imposed is critical to the negotiation process, and may be helpful in devising structures that will lessen the tax impacts.
The Sunshine State imposes two different taxes on mortgages. One, the documentary stamp tax (not to be confused with the transfer tax by the same name), is an excise tax on the mortgage document. The rate is 0.35 percent of the amount secured rounded up to the nearest $100. The other tax is called nonrecurring intangible tax and is an ad valorem tax on the ownership of the obligation secured by the mortgage. The rate is 0.2 percent of the amount secured. Future advances are taxed when made.
Both the borrower and the lender are liable for the documentary stamp tax, but only the lender is liable for the intangible tax. Both may be passed on to the borrower by agreement.
There are a number of subtle differences between the two taxes:
- Stamp tax is imposed only if the mortgage is recorded while intangible tax is payable whether or not the mortgage is recorded
- Stamp tax is imposed on mortgages that secure contingent obligations such as guaranties, while intangible tax is imposed on these mortgages only when the contingency is removed (guaranty is called)
- Stamp tax is imposed on leasehold mortgages and intangible tax is not
- Stamp tax is imposed on mortgage assumptions and intangible tax is normally not
- Stamp tax is measured by the amount of debt secured while the intangible tax base will not exceed the value of the property
- Stamp tax is imposed on a collateral assignment of mortgage, while intangible tax is not
- Both taxes have slightly differing formulas for the imposition of tax when the underlying debt is secured by property in more than one state
- Neither tax is re-imposed when one lender sells a note to another
- Both taxes have exemptions for refinance of existing debt
It is important to understand these taxes when collateral for a loan is determined as certain structures and collateral mixes can result in reduced tax. It is particularly important to understand these taxes when financed real estate is sold, or refinanced, as often there are planning opportunities to reduce or eliminate some or all of these taxes in such circumstances.
Sales tax is imposed on the transfer of tangible personal property in Florida unless an exemption is applicable. While there are a host of potential sales tax exemptions, the sales tax issue in real estate transactions most often arises when the property being sold includes furniture and equipment. The classic example is the sale of a hotel. In a mixed transaction, sales tax is always paid on any motor vehicles included in the sale. Inventory (property held for sale to customers) is also taxable unless the buyer registers as a sales tax dealer and acquires the property for resale. The tricky issue is furnishings and other equipment. Ordinarily, a single lump sum sale of tangible personal property by a person not in the business of making such sales is exempt under the casual sale exemption. However, that exemption does not apply where similar transactions have occurred in the past, or when there is a broker involved in the transaction.
Recognizing the practical realities of raising a sales tax issue in every broker assisted mixed real estate sale, the Florida DOR has adopted nonbinding guidance indicating that where the tangible property is neither separately stated, nor separately priced, then the transaction will be deemed primarily for real estate and no sales tax will be imposed (although documentary stamp tax would be paid on the entire purchase price). The issue exists in broker assisted transaction where these two safe harbor requirements are not met.
Florida is also unique in that it imposes sales tax on commercial rentals. The rate is 6 percent for the State and up to 1.5 percent in local option taxes. The tax is collected by the landlord and remitted to the DOR. Rent includes everything paid to, or for the benefit of the landlord. Thus, the payment of ad valorem taxes and common area maintenance by the tenant is also subject to this tax. Depending upon the terms of the lease, the cost of tenant improvements paid for by the tenant may or may not be considered rent. Importantly, there are no intercompany lease exemptions. One popular structure in other states is to have a real estate holding company own the real property, then lease it to a related operating company. In Florida, that strategy will likely create a large sales tax liability as all funds expended by the operating company such as ad valorem tax, insurance, mortgage payments and the like will be characterized as rent subject to this tax.
Transferee Liability For Florida Taxes
Section 213.758 Florida Statutes makes the purchaser or transferee of more than 50 percent of the assets of a business responsible for the seller's unpaid Florida taxes. The rule applies to sales tax, communication service taxes and a host of lesser taxes administered by DOR, but not to corporate income tax. This rule is troubling when real estate assets are a major part of an ongoing business such as an office building, shopping center or hotel because these types of assets are generally held in a single purpose entity. The purchaser liability can be avoided if the seller gets a clearance certificate from DOR, which is available if the seller is current on their filings, and is not currently under audit.
There is a similar rule for transferee liability for the seller's Florida corporate income tax, which is imposed on C corporations, but not pass through entities. The corporate income tax liability applies only when there is a sale of substantially all of the seller's assets. This provision does not allow the liability to be avoided with a clearance certificate.
Ad Valorem Tax
Counties, cities, schools, and other local governments impose ad valorem taxes on Florida real estate. The tax is assessed based on the value of the property on January 1 of each year. The value is determined annually by a County Property Appraiser. Exemptions are also based upon the January 1 status of the property and generally must be claimed by filing an exemption application by March 1.
The value of property is reassessed every year based upon a number of factors. While the assessed value does not automatically track the amount paid for a transfer, the purchase price is easily determined by the Property Appraiser based upon the amount of transfer taxes paid.
The Florida Constitution imposes a 3 percent cap on the annual increase of the value of homestead property, and a 10 percent cap on the annual increase of most other property. The baseline for the cap is reset when the property is transferred, or when there is a change of control in any entity which owns the property. Changes in control must be reported to the Property Appraiser.
Florida's complex and often unique tax rules need not slow down or derail your real estate transactions. Anticipation of these issues in advance, and planning to minimize them is critical to a smooth ride. We regularly assist clients and their advisors with Florida tax planning in simple and complex real estate transactions.