Was documentary stamp tax based only on the mortgage when encumbered property moved to an LLC owned by the transferor's trust?

Plain-English summary

An individual owned an encumbered manufactured-housing community and proposed deeding it to a new LLC. The LLC's sole member would be the individual's revocable trust, and the individual was the trust's sole settlor and sole beneficiary during life. No consideration other than the existing mortgage would be given.

Florida found no change in beneficial ownership, so the property's fair market value did not enter the documentary-stamp-tax base. The transfer was still taxable, however, because section 201.02 treated the mortgage encumbering the property as consideration whether or not the underlying debt was assumed.

Tax was therefore due only on the outstanding mortgage balance at the time of the deed.

What this means for you

Unchanged beneficial ownership can remove fair market value from the tax base without making an encumbered transfer entirely tax-free. An outstanding mortgage or other consideration can still create documentary stamp tax.

Common questions

Was tax based on the property's fair market value? No. Florida excluded fair market value because beneficial ownership did not change.

What amount was taxable? The outstanding mortgage balance at the time of conveyance.

Why did beneficial ownership remain the same? The LLC's sole member was the transferor's revocable trust, and the transferor was the trust's sole lifetime beneficiary.

Did it matter whether the debt was formally assumed? The statute quoted in the ruling includes a mortgage or other encumbrance as consideration whether or not the underlying indebtedness is assumed.

Citations and references

• Fla. Stat. § 201.02(1) (mortgages and other consideration for deed tax)
• Fla. Admin. Code r. 12B-4.013(25), (32) (mortgage balance and trust conveyances)
• Crescent Miami Center, LLC v. Department of Revenue, 903 So. 2d 913 (Fla. 2005)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 06B4-010

Original ruling text

SUMMARY
QUESTION: Will encumbered property transferred from an individual to a limited liability company whose sole
member is a trust of which the taxpayer is the sole beneficiary be subject to documentary stamp tax only on the
mortgage balance at the time of the conveyance?
ANSWER - Based on Facts Below: Since there is no change in beneficial ownership of the property when it is
conveyed by deed from the individual to its limited liability company, tax is only due on the mortgage balance, which is
defined as consideration per s. 201.02(1), F.S.

December 15, 2006

Re: Technical Assistance Advisement No. 06B4-010
Documentary Stamp Taxes
Conveyance of Real Property from Trustee to Limited Liability Company
Section 201.02(1), F.S.
Rule 12B-4.013(32), F.A.C.
XXX ("Taxpayer")
XXX ("Trust")
XXX ("Property")
Dear:
This is in response to the request for a Technical Assistance Advisement dated November 1, 2006, concerning a
conveyance of real property from a trustee of a revocable trust to a limited liability company that has yet to be formed.
Facts Presented by the Petitioner
Taxpayer currently owns title to a manufactured housing community Property. Taxpayer desires to convey the
Property to a limited liability company ("Company") that has yet to be formed.
The sole member of the Company will be the Trust. Taxpayer is the sole settlor of the Trust and the sole
beneficiary during her lifetime. The Property is encumbered by a mortgage, with no separate consideration being
given for the transfer.
Requested Ruling
Taxpayer wishes a determination as to whether the Property may be conveyed by deed to the Company, thus
resulting in a liability for documentary stamp taxes based only on the unpaid balance of the mortgage instead of on
the fair market value of the property.

Law and Discussion
In order to have the documentary stamp tax apply to a conveyance of real property, two tests must be passed:

1. There must be a document that conveys real property;
2. There must be consideration for that conveyance.
   Under s. 201.02, F.S., effective July 1, 1990, the definition of consideration was included in the law and specified
   that:
   (1)... 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 property or interest therein. (e.s.)
   In 1990, Section 201.02(1), F.S., was amended by Section 7, Chapter 90-132, Laws of Florida, to include a
   statutory definition for "consideration," as quoted above. The amended statute includes four types of exchange
   mediums that constitute consideration: (1) the payment of monies; (2) the discharge of an obligation; (3) a mortgage
   on the property whether discharged or not; and (4) the fair market value of the property exchanged.
   Also, under Rule 12B-4.013, F.A.C., the basis for the tax is measured by the outstanding principal balance of a
   mortgage:
   (25) Mortgage on Property: When computing the tax under Section 201.02, F.S., on a deed of conveyance, the total
   consideration includes any mortgages encumbering the property transferred.
   In the case of Crescent Miami Center, LLC v. Department of Revenue, 903 So.2d 913 (Fla. 2005), the Florida
   Supreme Court effectively invalidated certain portions of the Documentary Stamp Tax Rules, specifically Rule 12B4.013(7), (8), and (10), F.A.C. These rule subsections state that there is a presumption the documentary stamp tax is
   due on the fair market value of the real property transferred to or from a corporation or partnership.
   Generally, the court's ruling means that documentary stamp tax is not due on a deed when:
3. The grantor(s) directly or indirectly owned the same proportionate interests in the real property as the grantee(s)
   both before and after the transfer; and
4. The property is not encumbered by mortgage or other lien.
   However, tax will be due on a deed based upon the outstanding amount of any mortgage and/or on the amount of
   any other consideration.

In the proposed transaction, the property is encumbered by a mortgage. However, there will be no change in
beneficial ownership of the property when it is conveyed by deed from the Taxpayer to the proposed Company, where
the sole member is the Trust, since Taxpayer is sole beneficiary of the Trust. For this reason, the fair market value of
the property is not included in computing the taxable consideration for documentary stamp tax purposes. Therefore,
one need only look to the mortgage as the consideration for the transfer.
Department's Position
Under the provisions of s. 201.02(1), F.S., and the additional reasons given, tax is due, based only on the
mortgage balance at the time of the conveyance from the Taxpayer to the Company.
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 than expressed in this response.
You are further advised that this response, your request and related backup documents 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
JBE/mh
Record ID: 26158