Does North Carolina's real estate excise stamp tax apply to a deed transferring the lessee's ownership interest in improvements built on leased land, where the underlying ground lease keeps those improvements in the lessee's ownership during the lease term?

Plain-English summary

In Durham, a foundation owned a tract of land and granted long-term ground leases to a tenant called "T." The leases said any buildings T constructed on the leased land would remain T's property during the lease term, not the landlord's. T built buildings and then sold the bundle of (1) its ground lease and (2) its ownership of the improvements to a purchaser. Two documents were used: an assignment of the ground lease, and an instrument shaped like a deed conveying the buildings.

The county attorney asked whether the deed-form instrument was subject to North Carolina's real estate excise stamp tax under G.S. § 105-228.30.

Special Deputy Myron C. Banks concluded no.

The statute taxes "each deed, instrument or writing by which any lands, tenements or other realty shall be granted, assigned or otherwise conveyed." The question was whether the buildings, which T owned but T did not own the underlying land, qualified as "realty."

The AG used the legal term "chattels real" to characterize the interest. Quoting 63A Am. Jur. 2d, Property, § 23:

Chattels real are interests in real estate less than freehold, and are personal property. They are to be distinguished, on the one hand, from things which have no concern with the land, such as mere movables and rights connected with them, which are chattels personal, and on the other hand, from a freehold, which is realty. Where a person erects buildings on leased premises under an agreement in the lease that he may remove them, or places machinery in buildings under a similar agreement, the buildings and the machinery follow the term and partake of its character as a chattel real.

So leasehold improvements owned by the lessee are interests in real estate, but they are personal property, not realty.

The opinion's analytical move was to look at the federal predecessor of the state statute. Before its repeal, IRC § 4361 imposed a documentary stamp tax on conveyances using almost identical language. The Treasury regulations interpreting that federal statute (Reg. § 47.4361-2) defined "realty" to include:

(a) Those interests in real property which endure for a period of time, the termination of which is not fixed or ascertained by a specific number of years, such as an estate in fee simple, life estate, perpetual easement, etc., and

(b) Those interests enduring for a fixed period of years but which, either by reason of the length of the term or the grant of a right to extend the term by renewal or otherwise, consist of a bundle of rights approximating those of the class of interests mentioned in (a) of this subdivision.

A lessee-owned building under a fixed-term ground lease would fall outside both categories: it does not endure indefinitely like a fee simple, and it does not have the perpetual-renewal characteristic of category (b). The federal regulation therefore would not have treated it as "realty," and the federal documentary stamp tax would not have applied.

Because North Carolina patterned § 105-228.30 on the federal statute, the AG concluded that the legislature intended to follow the federal interpretation. The deed-form instrument conveying the lessee-owned leasehold improvements was therefore outside the scope of the excise stamp tax.

Practical takeaway: in a ground lease structure where the lessee owns the improvements, the sale of the leasehold-improvement interest does not trigger NC excise tax, even when documented in deed form.

Currency note

This opinion was issued in 1986. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. G.S. § 105-228.30 has been amended in the decades since 1986 (the rate has changed, the collection mechanism has been refined). The federal documentary stamp tax predecessor (IRC § 4361) was repealed in 1965, so the federal regulation that the AG relied on is no longer being updated. North Carolina courts and the Department of Revenue may have addressed the leasehold-improvement question in modern guidance. A current real estate practitioner should check the Department's recent rulings before relying on the 1986 conclusion.

Background and statutory framework

Real estate excise (or transfer) taxes are a common state revenue source on real property transactions. North Carolina's excise tax has historically been modest (typically $1 per $500 of consideration, paid by the seller, collected by the register of deeds when the deed is recorded). The tax is a one-time charge at recording, not an ongoing tax.

The technical scope of the tax matters because real estate transactions are routinely structured to capture or avoid it. Ground-lease structures, sale-leaseback structures, and joint-venture arrangements involving real estate can shift consideration around among the various interests in real property. The legal characterization of each interest (fee simple, ground lease, leasehold improvements, easement) determines whether and how the excise tax applies.

The 1986 question was a clean illustration of structuring affecting tax treatment. The same economic transaction (sale of the use of land plus the buildings on it) could be structured as either (a) a deed of the fee with a leaseback or (b) a ground lease with separate ownership of the improvements. Structure (a) would trigger the excise tax on the full fee sale. Structure (b), per this opinion, did not trigger the excise tax on the building portion (and arguably not on the leasehold assignment either, though the AG did not address that).

The reference to "chattels real" is a useful piece of legal vocabulary. Chattels real bridge the gap between freehold interests in land (which are realty) and ordinary personal property (which is chattels personal). They include leasehold interests, lessee-owned improvements, mortgages, and some other property rights tied to land. They are governed by personal property law in many respects (transferable by bill of sale, subject to UCC where applicable, no transfer tax in this jurisdiction) while being treated like realty for some purposes (subject to recording statutes, dower and curtesy considerations, etc.).

Common questions

Was the ground lease assignment itself subject to the excise tax?

The opinion did not address that separately. The Treasury regulation suggests that an ordinary fixed-term ground lease assignment would not be subject to documentary stamp tax under the federal predecessor, and by extension would not be subject to the NC excise tax. Modern Department of Revenue guidance should be checked.

What if the ground lease had a 99-year term?

Treasury Reg. § 47.4361-2 category (b) covered interests enduring for a fixed period of years that consisted of "a bundle of rights approximating those" of an enduring fee-like interest. A 99-year ground lease arguably falls within that category and could be treated as realty for tax purposes. The 1986 opinion did not resolve where the line fell.

What if the buildings would revert to the landlord at lease termination?

The lease in the Durham case kept the buildings in the lessee's ownership during the lease term. A different structure where buildings reverted at lease termination would still have lessee ownership during the term, but the lessee's interest would be shorter and arguably more clearly outside the "realty" definition. The reversion at term would itself be a separate non-tax event because no transfer tax is due on natural expiration.

Does this opinion apply to mobile homes on leased lots?

The opinion's reasoning would suggest yes: a mobile home owned by the lessee of a lot is a chattel real, governed by personal property tax rules rather than real property transfer taxes. North Carolina has separate statutory provisions for manufactured housing that may complicate the analysis.

Source

• Landing page: https://ncdoj.gov/opinions/taxation-excise-stamp-tax-on-conveyances-conveyance-of-leasehold-improvements-owned-by-lessee/

Citations

• G.S. § 105-228.30 (NC real estate excise stamp tax)
• IRC § 4361 (former federal documentary stamp tax)
• Treas. Reg. § 47.4361-2 (definition of realty under former federal documentary stamp tax)
• 63A Am. Jur. 2d, Property § 23 (chattels real)

Original opinion text

Requested By: Thomas Russell Odom Durham County Attorney

Question: Is an instrument conveying ownership of leasehold improvements, owned by a lessee, from the lessee to a purchaser subject to the excise stamp tax on conveyances?

Conclusion: No.

The Durham County Attorney states the following facts:

"A Foundation is the owner of certain lands situated in Durham County, State of North Carolina. The Foundation enters into multi long-term ground leases with T and affiliates of T. The ground leases provide for the construction upon the leased land of certain improvements by the Lessee with specific clarification that the improvements so construed would remain in the ownership of the Lessee during the term of the ground lease. Subsequent to completion of the construction of the improvements upon the leased land by T, T entered into a contract of sale and purchase of the ground leases and the improvements constructed thereon with Purchaser. Purchaser consummates the purchase of the leasehold interest of T and the purchase of the improvements constructed upon the leasehold from T. The transactions for transfer of ownership of the leases and leasehold improvements were evidenced by two documents for each leasehold interest. They were (1) an assignment to Purchaser of the Lessee's interest in the ground lease to T, and (2) an instrument in the form of a deed of conveyance transferring the ownership from T to Purchaser of T's interest in the improvements constructed on the leased lands which, (by the terms of the underlying ground lease, remained in the ownership of Lessee during the full term of the ground lease."

He asks:

"Is the instrument in the format of a deed transferring the ownership of the leasehold improvements from T Lessee to Purchaser subject to the payment of North Carolina Real Estate excise tax?"

The statute levying the tax imposes the tax "on each deed, instrument or writing by which any lands, tenements or other realty shall be granted, assigned or otherwise conveyed to, or vested in, the purchaser or purchasers. . . ." G.S. 105-228.30.

Perhaps the most accurate way to characterize the nature of the property transferred is to call it a "chattel real."

"Chattels real are interests in real estate less than freehold, and are personal property. They are to be distinguished, on the one hand, from things which have no concern with the land, such as mere movables and rights connected with them, which are chattels personal, and on the other hand, from a freehold, which is realty. Where a person erects buildings on leased premises under an agreement in the lease that he may remove them, or places machinery in buildings under a similar agreement, the buildings and the machinery follow the term and partake of its character as a chattel real."

63A Am.Jur.2d, Property, § 23. Such property is both "an interest in real estate," and personal property. Is the conveyance of such property the transfer of "lands, tenements or other realty," in the words of the statute? G.S. 105-228.30.

The quoted language of the statute comes directly from the former federal law. IRC § 4361. The applicable regulation which dealt with the meaning of the statute provided:

"(4) For purposes of the regulations in this part-

(i) The term 'realty' includes-

(a) Those interests in real property which endure for a period of time, the termination of which is not fixed or ascertained by a specific number of years, such as an estate in fee simple, life estate perpetual easement, etc., and

(b) Those interests enduring for a fixed period of years but which, either by reason of the length of the term or the grant of a right to extend the term by renewal or otherwise, consist of a bundle of rights approximating those of the class of interests mentioned in (a) of this subdivision.

Reg. § 47.4361-2.

It is clear from the regulation that the interest conveyed here does not rise to the level envisioned by the regulation. It is consequently likely that the Legislature intended to track the federal result in adopting a state law patterned after the federal statute. It is therefore our opinion the described instrument, conveying ownership of leasehold improvements owned by the lessee and conveyed by it to a purchaser, is not subject to the excise stamp tax on conveyances.

LACY H. THORNBURG
Attorney General

Myron C. Banks
Special Deputy Attorney General