June 19, 2014
When closing a real estate transaction, every state requires that one or both parties report to the local taxing authority the sales price of the property. This report is used for two primary reasons: (i) to establish the amount of the transfer tax or conveyance fee for the transaction and (ii) to establish the taxable value of the property for real estate taxation purposes going forward.
In Ohio the sale price is signed by the grantee under the deed, and is reported on a state-mandated conveyance fee form. In Kentucky, the grantor and grantee must sign an affidavit of consideration attesting to the sales price. Both forms are prerequisites to getting a deed of record.
Now, before we go any further with this post, it is important to note that the amount reported is not discretionary and not to be treated lightly. In both Ohio and Kentucky, the reporting form is a sworn statement (i.e., under oath), the falsification of which is a felony. So we are not suggesting misrepresenting anything on those forms. But an honest approach to the consideration question can yield different results depending on the circumstances.
With those items as background, many considerations drive the reported sales price on the conveyance fee form or consideration affidavit: (i) the stated contract price, (ii) federal tax considerations (e.g. basis and capital gains), (iii) the value to be “booked” for a sale, and (iv) appearances for banks and equity partners. But frequently overlooked by the dealmakers is one of the most significant consequences of the price reported: the real estate taxes for years and years going forward will either be dictated by or strongly influenced by the number appearing on that form.
Many times we find in our property tax valuation work that buyers and sellers thoughtlessly put a high value on those forms, which may include the value of the business operating inside the property, furniture, fixtures and equipment, and other factors unrelated to the actual value of the real estate acquired.
With annual rates of taxation in Ohio ranging between 1.7% to 3.2% of the valuation and annual rates of taxation in Kentucky being around 1.1% annually, the consequence of unnecessarily over-reporting the sales price can be costly year after year after year.
Thus, we carefully counsel buyers to consider stripping from the reported sales price the FF&E, the goodwill, cash and A/Rs of a business being acquired, and other factors that are unrelated to the real estate transaction. The net effect can be an annualized savings going forward of 1.1 to 3.2 percent of the excised property’s value going forward.