Property Transfer Tax Upon Contribution of Property to Business Entity
Posted on Feb 06, 2012
Anyone planning to transfer real estate into any kind of business entity needs to be aware of the provisions of the Vermont property transfer tax (32 V.S.A. § 9601 et. seq.). The tax, as its name suggests, applies to transfers of title to real property. There are a number of exemptions to the applicability of the tax. Three of those exemptions apply to transfers into corporations, partnerships, and limited liability companies (LLCs). Unfortunately, the Vermont statute places a substantial qualification on the exemptions.
Transfers of property into business entities by their owners are typically tax-free transactions under federal income tax law. The Vermont property transfer tax statute generally states that such transactions will also be exempt from the transfer tax so long as no gain or loss is recognized under the Internal Revenue Code. Unfortunately, the legislature codified an additional restriction in Vermont’s property transfer tax. Each of the exemptions for contributions to corporations, partnerships, and LLCs is limited to contributions made upon formation.
The Tax Department has been left with the task of determining when an entity has in fact been formed. For many years, the Department used a policy that a taxpayer had 90 days to contribute property after the Secretary of State issued a charter for an entity. The Vermont Supreme Court disallowed this bright line methodology for LLCs in Polly’s Properties, LLC v. Department of Taxes (188 Vt. 157 (2010)). The Court required the Tax Department to engage in more of a factual inquiry as to when the LLC was “formed” before imposing the tax.
The Tax Department has since responded to the court case by amending the instructions to the property transfer tax return to state that the exemptions are allowed only if there is no capital in the entity. A footnote to the exemption provides examples of capital including, but not limited to, “cash, real and personal property, stocks, patents and other intangibles, and borrowed funds.” This policy will mean that the real estate would have to be the very first property contributed to the entity. Taxpayers should use extreme caution in this area to avoid having to pay a tax that would not otherwise be due.