Was documentary stamp tax due when a trust transferred mortgaged Florida property to a new LLC for a 100% membership interest?

Plain-English summary

Florida imposed documentary stamp tax on the trust's proposed transfer of mortgaged commercial property to a new LLC. The trust held legal title, the LLC would receive the property, and a 100% membership interest would be issued in exchange.

The beneficiaries' continuing economic interests did not make the LLC a trust beneficiary. Florida treated the LLC as a separate non-beneficiary grantee, so the trustee-deed exemption did not apply.

The ruling used the property's fair market value as the tax base on the stated assumption that fair market value exceeded the mortgage balances. It distinguished Kuro because that case did not involve encumbered property, and it cited another case allowing indebtedness to control when debt exceeded value.

What this means for you

Moving trust-owned real estate into an LLC can be a taxable conveyance even when the same people remain economically interested. The grantee's legal status, the ownership interest issued in exchange, property value, and outstanding debt all matter.

Common questions

Q: Was the LLC treated as a beneficiary of the trust?
A: No.

Q: Did the beneficiaries' ownership of the LLC preserve the trust exemption?
A: No. Their LLC interests were interests in the entity, not direct beneficial ownership of its real estate.

Q: What tax base did the ruling use?
A: Fair market value on the stated assumption that it exceeded the mortgage balances.

Citations and references

• Fla. Stat. § 201.02(1) — documentary stamp tax and consideration
• Fla. Admin. Code r. 12B-4.013(32)(g) — trustee deed to a non-beneficiary
• Kuro, Inc. v. Department of Revenue, 713 So. 2d 1021 (Fla. 2d DCA 1998) — distinguished
• Chapparal Partners v. Department of Revenue, 662 So. 2d 727 (Fla. 1st DCA 1995) — encumbered-property tax base cited
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03B4-006

Original ruling text

SUMMARY

QUESTION: Under the scenario where a Trust is proposing
forming a new Florida limited liability company and
transferring encumbered real property from the Trust to the
new Florida limited liability company in exchange for a one
hundred percent membership interest, are documentary stamp
taxes due on the transfer?

ANSWER - Based on Facts Below. Yes, documentary stamp tax
would be due on the transfer of the encumbered property
from the Trust to the newly formed Florida limited
liability company. Because the Trust is an artificial
entity with legal title to the trust assets, and a 100%
membership interest will be issued in exchange for the
transferred property, the provisions of s. 201.02(1), F.S.,
apply upon transfer of property from the Trust to the
limited liability company. The limited liability company
is not a beneficiary of the Trust; thus the provisions of
Rule 12B-4.013(32)(g), F.A.C. are applicable. Simply
because the trust beneficiaries would become "beneficial
owners" of the limited liability company (as opposed to the
real property conveyed to the limited liability company)
after the transfer does not negate the fact that the
limited liability company is not a named trust beneficiary.
Documentary stamp tax would be due based on the fair market
value of the property transferred from the Trust to the
non-beneficiary, the limited liability company, presuming
the fair market value exceeds the amount of mortgages
encumbering the property.

Apr 28, 2003

Re: Technical Assistance Advisement No. 03B4-006
Documentary Stamp Tax - Transfer of Encumbered Property to
Artificial Entity from Trust
Section 201.02(1), F.S.
Rule 12B-4.013(32), F.A.C.

XXX ("Trust")
XXX ("Beneficiaries")

Dear :

This is in response to your request for a Technical
Assistance Advisement requesting an opinion whether documentary
stamp tax imposed under s. 201.02(1), F.S., is due on the
transfer of encumbered property in certain circumstances, as
described below.

FACTS PRESENTED BY PETITIONER

Trust owns certain improved commercial real property
("Property") in Florida. Property was transferred to Trust in
1993. Each Trust Beneficiary has a twenty-percent beneficial
interest in Trust. Property is encumbered with certain bank
indebtedness.

In order for Trust to separate ownership of Property for
various purposes, the Trust is considering forming a new limited
liability company ("LLC") and transferring Property to LLC in
exchange for a one hundred percent membership interest. Such
membership certificates would not be issued until after transfer
of Property to Trust.

REQUESTED ADVISEMENT

Trust requests that the Department confirm that transfer of
Property to LLC from Trust will not be subject to documentary
stamp tax for the following reasons.

Rule 12B-4.013(32)(e), F.A.C., provides, in relevant part,
that:

A deed of real property from a trustee to X is not subject
to the stamp tax to the extent of X's beneficial ownership
interest as a trust beneficiary immediately before the
conveyance, whether or not the real property is encumbered
by a mortgage....

Rule 12B-4.013(32)(h)2., F.A.C., provides that all
conveyances from a trustee are equally taxable or exempt as
provided in Rule 12B-4.013, F.A.C., regardless of whether the
grantee is a natural person or an entity. The decision rendered
in TAA 97(B)4-007, where the Department concluded documentary
stamp tax did not apply to a transfer of encumbered property
from a trustee to an IRA, where the same individual was the sole
beneficiary of both the trust and the IRA, is also applicable.

The rationale of the above rule provisions is that the
transfer of real property from the trustee of a trust to a
grantee should not be subject to documentary stamp tax if the
beneficial ownership of the property is the same before and
after. In the instant situation, each Beneficiary will have a
twenty-percent beneficial interest in the Property both before
and after the proposed transfer. Therefore, based on the
authorities discussed above, the proposed transfer of Property
from Trust to LLC should not be subject to documentary stamp
tax, even though the property is encumbered by a mortgage.

Although Rules 12B-4.012(2)(b) and 12B-4.013(7), F.A.C.,
may appear to be contrary to the requested position to the
extent they conclude that the transfer of real property to an
entity in exchange for an ownership interest in the entity is a
transfer for consideration presumed to be equal to the fair
market value of the real property, these authorities have been
superseded by Kuro, Inc. v. Department of Revenue, 713 So.2d1021
(Fla. 2nd DCA 1998).

DISCUSSION AND LAW

Section 201.02, F.S. (2001) provides as follows:

201.02 Tax on deeds and other instruments relating to real
property or interests in real property.--

(1) On deeds, instruments, or writings whereby any lands,
tenements, or other real property, or any interest therein,
shall be granted, assigned, transferred, or otherwise
conveyed to, or vested in, the purchaser or any other
person by his or her direction, on each $100 of the

consideration therefor the tax shall be 70 cents. When the
full amount of the consideration for the execution,
assignment, transfer, or conveyance is not shown in the
face of such deed, instrument, document, or writing, the
tax shall be at the rate of 70 cents for each $100 or
fractional part thereof of the consideration therefor. For
purposes of this section, consideration includes, but is
not limited to, the money paid or agreed to be paid; the
discharge of an obligation; and the amount of any mortgage,
purchase money mortgage lien, or other encumbrance, whether
or not the underlying indebtedness is assumed. If the
consideration paid or given in exchange for real property
or any interest therein includes property other than money,
it is presumed that the consideration is equal to the fair
market value of the real property or interest therein.
(E.S.)

Rule 12B-4.013(32)(g), F.A.C., states, in pertinent part:

The stamp tax applies to a trustee's deed of real property
to grantees that are not beneficial owners as trust
beneficiaries immediately before the conveyance, to the
extent of the consideration given, if any, for the interest
in the real property transferred to the non-beneficiaries
grantees....

DETERMINATION

The Kuro case is not applicable to the proposed transfer,
since it did not involve a transfer of encumbered property.
There is no legal basis for broad application of the Kuro
decision beyond the scope of the facts and circumstances of the
case itself. Because Trust is an artificial entity with legal
title to the trust assets, and membership interests are to be
issued to Beneficiaries in exchange for the transferred
Property, the provisions of s. 201.02(1), F.S., apply upon
transfer from Trust to LLC.

Note that Chapparal Partners v. Department of Revenue, 662
So.2d 727 (Fla. 1st DCA 1995) upheld the Department's assessment
based on the amount of the indebtedness encumbering property at

time of conveyance, since the amount of the indebtedness
exceeded the fair market value of the property.

Because LLC is not a beneficiary of Trust, the provisions
of the Rule 12B-4.013(32)(g), F.A.C., are applicable. Simply
because Trust Beneficiaries would become "beneficial owners" of
LLC (as opposed to the real property conveyed to the LLC) after
transfer does not negate the fact that LLC is not a named trust
beneficiary. Therefore, documentary stamp tax would be based on
the fair market value of the property transferred from Trust to
non-beneficiary, the LLC, presuming the fair market value
exceeds the amount of mortgages encumbering the property.

The TAA quoted in your letter relating to a "beneficial
interest" held by a trustee/beneficiary transferring property
from a trust to his IRA is not applicable, since it does not
involve the same fact pattern. Unlike a trust, there are no
beneficiaries when an LLC is formed. Instead, in exchange for
the real property conveyance, the LLC members each receive a
membership interest, which is classified by the Florida statutes
as personal property. The LLC itself owns title to the real
property, and the members' "benefits of ownership" consist of
distributions, withdrawals, possible loans to or from LLC, and a
proportionate share of the LLC's income or loss. No one member
of the LLC can sell any of the real property owned by the LLC
without consent of the other members, unless spelled out by
agreement. If this were the case, such member would still be
acting on behalf of the LLC itself.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice, as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment from that
which is expressed in this response.

You are further advised that this response, your request

and related backup are public records under Chapter 119, F.S.,
and are subject to disclosure to the public under the conditions
of s. 213.22, F.S. Confidential information must be deleted
before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Sincerely,

Joy B. Eldred, CPA
Tax Law Specialist
Technical Assistance and Dispute Resolution
Office of the General Counsel

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