The NH real estate transfer tax imposes a tax on the transfer, sale, and granting of real property located in NH. All real estate transfers are presumed to be subject to this tax unless specifically exempted. In 2006, the NH State Legislature amended certain provisions of the law relating to the transfer of real property. Specifically, the new law adds language that broadens the scope of transactions subject to the tax. Transfers of an interest in a “real estate holding company,” or an entity holding an interest in a real estate holding company, are now subject to the real estate transfer tax.
A real estate holding company is any business organization engaged principally in the business of owning, holding, selling, or leasing real estate and which owns real estate or an interest in real estate within the state. For example, placing a piece of real estate into an entity (such as an LLC) could qualify that entity as a real estate holding company.
The New Hampshire Department of Revenue Administration (“DRA”) has recently proposed a rule change affecting the real estate transfer tax. Under the current rules, a transfer of real estate into a real estate holding company that is subject to the transfer tax is not taxed a second time upon receipt of an interest in that real estate holding company in exchange for the property. However, under the new proposed rules the real estate transfer tax will apply both when real estate is contributed to an entity, and when the contributor receives an interest in that entity in exchange for the contribution. The new proposed rules would apply similarly to a liquidating distribution of property from a real estate holding company. The distribution of real estate would be subject to tax, as would the relinquishment of the distributee’s interest in the real estate holding company. Effectively, the proposed rule imposes a double real estate transfer tax on anyone exchanging property and an interest in a real estate holding company.
This proposed change in the rules is significant. There are large numbers of individuals in this state who purchase real estate, either for themselves or for their business, and place that property into an LLC or similar entity merely for estate planning purposes or for liability protection. If the proposed rules go into effect, these individuals and entities will be required to pay double real estate transfer tax or forego their planned transaction. Rightfully so, this proposed change is a concern to many small business owners who own or purchase real estate with the intent of placing it in an entity for asset protection. Many practitioners have expressed concern regarding the proposed rules, and it is possible that the DRA will revise the proposed rules to address these concerns.
The recent changes to the law alter the definition of a real estate holding company. Under the current law, a real estate holding company is an enterprise that holds real estate from which it derives the majority of its yearly revenues from the sale or lease of real estate, or if the fair market value of the real estate held in the enterprise exceeds one half of the total fair market value of all the assets in the entity. The proposed change gets rid of the revenue and fair market value tests and says that a real estate holding company is one that is engaged “principally” in the business of owning, holding, selling, or leasing real estate.
The revised definition would seem to be more favorable to taxpayers in that it would allow business entities whose principal business was not real estate, but who in fact had substantial assets in real estate, from being classified as a real estate holding company.
However, the statutory changes are not all positive. The amended statute states that a transfer of an interest in an entity that holds an interest in a real estate holding company will be subject to the tax. Thus, the amended statute serves to pull in entities, including trusts, who are not themselves real estate holding companies, but who in fact own an interest in a real estate holding company. This is surprising to many businesses who do not themselves own any real estate, but who are forced to pay a real estate transfer tax when they transfer the interest they own in a real estate holding company. With regard to trusts, transferring real estate into a trust triggers the real estate transfer tax. The amended statute could potentially result in further real estate transfer taxes on trusts that own interests, and transfer those interests, in a real estate holding company.
The 2006 amended real estate transfer tax made some significant changes to the applicability of the tax with respect to real estate holding companies. The proposed rules, if enacted, would impose a double tax on all such transfers. Clearly, these issues have important consequences to NH residents and businesses and should be considered before engaging in any transactions that involve the transfer of real estate, a real estate holding company, or an interest in a real estate holding company. With respect to the proposed changes, we’ll all have to stay tuned.