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Attorneys Robert Lavoie, Michael Kushnir and William Donahue

March 1, 2004

Jon B. Sparkman and James L. Spaur* NH Society of CPAs Newsletter

Real Estate Holding Companies: New Attention to an Old Law

Have your clients heard from the New Hampshire Department of Revenue Administration (“DRA”) recently? If they haven’t, they may soon if they are a real estate holding company. A new area that is receiving audit attention from the DRA is transfers of interests in “real estate holding companies.” Specifically, the New Hampshire Real Estate Transfer Tax statute and administrative rules provide that the transfer of an interest in a real estate holding company is a taxable transfer. Despite the fact that this provision of the tax was added in 1997, taxation of transfers of interests in real estate holding companies have not drawn much attention. This portion of the tax is easy to miss because it is not intuitive that the real estate transfer tax would be triggered by a transfer of something other than real estate. In addition, unlike a transfer of real estate which involves recording a deed with transfer stamps attached, there is no similar collection point for the tax on transfers of interests in real estate holding companies. After a refresher on the application of the Real Estate Transfer Tax to real estate holding companies, this article will discuss some current developments in this area.

What is a Real Estate Holding Company?

The statute creating the Real Estate Transfer Tax is found at RSA 78-B and the administrative rules interpreting the statute are designated as Rev. 800. “Real estate holding companies” are defined as any enterprise organized as a legal entity separate from its owner which: (1) qualifies as a business organization subject to the business profits tax; (2) owns an interest in NewHampshire real estate; and (3) derives the majority of its yearly revenues from the sale or lease of real estate wherever located, or holds real estate or an interest in real estate wherever located, the fair market value of which exceeds one half of the total fair market value of all the assets, real or personal, tangible or intangible, of the entity, less any value ascribed to goodwill.

Determining the Tax Due

The computation of the real estate transfer tax due with respect to the transfer of a transferrable interest in a real estate holding company is determined based upon the portion of the interest in a real estate holding company being transferred. If 100% of the interests in a real estate holding company is transferred, then the amount of taxable consideration is the sum of the fair market value of all the NewHampshire real estate or interest in real estate owned or held by such real estate holding company. When a partial interest in a real estate holding company is transferred, then the taxable consideration is determined by multiplying the fractional interest transferred by the sum of the fair market value of all the New Hampshire real estate or interest in real estate owned or held by the real estate holding company. No deduction is made from the value of the real estate for mortgages or other liens on the property.

Reporting Transfers of Interests

The reporting and payment of the taxable transfers of interests in real estate holding companies are subject to four requirements. First, tranfers must be reported to the DRA within 30 days of a transfer on a Declaration of Consideration for Holding Companies Form CD-57-HC (the “Declaration”). Second, payment must be made to the DRA in conjunction with filing the Declaration. Third, the DRA “shall affix the approved stamp or metered indicia to the Declaration and provide a certified copy of the stamped Declaration to the taxpayers as evidence of the payment of real estate transfer tax.” Fourth, any Declaration filed which is exempt pursuant to N.H.RSA 78-B:2 “shall contain a brief citation of the reason for the exemption or exception in the space provided for the affixing of tax stamps on the document.” The Declaration of Consideration for Holding Companies FormCD-57-HC is available on the DRA’s website.

Advising Your Clients

As the DRA has become more proactive in auditing transfers of real estate holding company interests, tax and accounting professionals must also become more proactive in advising their clients of the potential tax liability. Often LLCs are set up to own real estate separately from an operating business, with the result that the LLC is a real estate holding company. As part of their diligence in preparing clients’ tax returns, tax and accounting professionals should be alert to which of their clients are real estate holding companies and whether these entities have transferred any interests. Last, the professional should determine whether or not these clients have reported and paid real estate transfer tax on those transfers of interest.

A comparison of past and present ownership information for all real estate holding company clients may identify a transfer that is more than 30 days old. In that case, tax and accounting professionals will need to advise their clients as to how to remedy the situation rather than waiting to have the issue pursued by the DRA. In addition to the penalties associated with the failure to file a return, the Real Estate Transfer Tax provides that a 100% penalty equal to the real estate transfer tax owed may be assessed in certain situations.

Recently, the applicability of the real estate transfer tax to transfers of interests in real estate holding companies has been called into question since the statute only taxes transfers of “transferrable interests”. Whether a planning opportunity exists for clients to make their interests “non-transferrable” remains to be seen.

In summary, tax and accounting professionals should be aware of the DRA’s recent audit activity regarding transfers of interest in real estate holding companies, should advise their real estate holding company clients of the potential tax liabilities, and develop a method for identifying clients that are subject to the real estate transfer tax because of a transfer of interest.

*Jon B. Sparkman, CPA, Esq. is a director and shareholder of Devine, Millimet & Branch, P.A. Jon currently serves on the Board of Directors of the New Hampshire Society of Certified Public Accountants. James L. Spaur, Esq. is an associate of Devine, Millimet & Branch, P.A. and member of the firm's Business & Tax Planning and Mergers and Acquisitions Practice Groups.