On January 9, 2009, important changes to Michigan’s Real Estate Transfer Tax Act went into effect that may impact the liability of certain owners of restaurants, hotels, resorts, golf courses or other real estate holdings in Michigan. These changes, which are retroactive to January 1, 2007, broaden the application of Michigan’s State Real Estate Transfer Tax. Prior statutes generally taxed only transfers of real estate, but as expanded, the statutes now extend to transfers of a controlling interest in an entity if 90 percent or more of the entity’s assets consist of real estate. A “controlling interest” means more than 80 percent of (1) the total value of stock of a corporation; (2) the total interest in capital and profits of a partnership, association, limited liability company (“LLC”), or other unincorporated business; or (3) the beneficial interest in a trust
Exemptions from the Michigan State Transfer Tax have been broadened to apply where (1) the transfer is made as a result of the dissolution of a corporation, LLC, partnership, or trust, and it is necessary to transfer the title of real property from the entity to the stockholders, members, partners, beneficiaries, or creditors; (2) a transfer is between any LLC and its members or between any partnership and its partners if the ownership interests in the entities were held by the same individuals and in the same proportion as before the transfer; (3) a transfer of a controlling interest in a entity with an interest in real property if the transfer of the property would also have been exempt if transferred between the same parties by deed; and (4) a transfer in connection with the reorganization of an entity where beneficial ownership does not change.
Tax rates were not affected by the new law. Nor was the county transfer tax altered. These taxes collectively amount to what is basically .86%, of the total consideration for the real estate in the transaction.
It is unclear how the new law will be administered, and many questions remain as to sales of equity interest which occurred in 2007 and 2008. The stated retroactivity is not only administratively awkward but is quite unique, especially since the bill leading up to the legislation was not even introduced until May 2008, making its purported reach extend backwards in time almost a year and a half. Moreover, it appears the January 1, 2007 date wasn’t even inserted in the bill until December 2008. The new statutes do not explicitly speak of any specific reporting obligation with respect to transactions involving sales of LLC’s or corporations before 2009.
We are monitoring this legislation in order to provide additional guidance to owners who acquired an interest in an entity that possesses title to real estate. For those individuals or entities that purchased a controlling interest in a restaurant, golf course, hotel or other real estate venture, please contact Varnum’s Property Tax Services and Appeals Group – Christopher P. Baker at 248/567-6400.