![]() ![]() The subject transfer may occur in one or more transactions which occur within a one-year duration of each other, preventing circumvention schemes being implemented through a series of separate transactions. The proposed legislation mandates disclosures to local taxing authorities when a transaction involves a conveyance/transfer of more than 50% of the membership interests in the so called “drop-down” or “pass through” LLC, which directly or indirectly owns real estate within the State of Ohio. 449, which seeks to permanently close this loophole. On December 17, 2019, representatives from the Ohio House introduced H.B. Today, Ohio is one of only a few states remaining where a party could effectuate this type of real estate transaction and avoid both the increase in the real estate’s taxable value and the conveyance fee. The benefits bestowed to the buyer and seller in these transactions are to the detriment of county auditors and school districts in the locales where the real estate is located.īack in 2018, the Ohio House of Representatives proposed legislation to close this loophole, but the House Bill never passed into law and the “drop and swap” – “LLC drop down” transactions continued. The benefits in structuring the sale in this manner are realized by both sides of the transaction as the seller typically pays the conveyance fee and the buyer will save the increased real estate tax assessment amount. The deferral of the taxable value of the real estate is achieved in those situations where the purchase price being paid by the buyer greatly exceeds the tax assessed value of the subject real estate as determined by the auditor of the county in which the subject real estate is located. ![]() Sellers and Buyers of real estate throughout the State of Ohio have routinely structured transactions in this manner to avoid the county conveyance fee (which is typically assessed at $4 per thousand dollars of the purchase price) and to defer the change in taxable value of the real estate in question. The transfer of the real estate to the new LLC is exempt from the county conveyance fee because no consideration changes hands in the initial real estate transfer, no Form DTE 100 (Real Property Conveyance Fee Statement of Value and Receipt) is required to be filed. Immediately after the new LLC takes title to the real estate, the members/owners of the LLC interests will enter into Membership Interest Purchase Agreement to sell the ownership interests in the new LLC to the buyer(s). ![]() This is the case because no consideration is exchanged in the initial transaction since the owners of the real estate will continue to be the owners of the new LLC. Therefore, the transaction can be properly recorded as an exempt transaction under Ohio Revised Code §319.54 and further exempt from the county auditor’s conveyance fee. ![]() At the time of this initial transfer of the real estate, the prior owners will continue to own the membership interests in the new LLC. In these types of transactions, the owner of a piece of improved real estate will create a new limited liability company and transfer the real estate into this new LLC directly prior to closing. Recently in Ohio it has been common practice to structure large commercial real estate transactions as “drop and swap” or “LLC drop-down” transactions. ![]()
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