Ohio Tax Law: Ohio legislature taking up LLC transfer tax

As reported by Eye on Ohio,  State Representatives Doug Green (R. 66th House District), and Mike Skindell (D. 13th House District), have put forth Ohio House Bill 449 in late December, seeking to capture conveyance taxes when entities owning real estate, are sold. Read the bill and follow its status here.

What is a “Drop and swap?

Called a “membership interest transfer” or “drop and swap,” conveying the entity that owns real property rather than simply selling the real property directly, allows buyers to avoid reporting the transfer as a sale of real property, and the value placed on the property as part of the transaction. County auditors and school boards in particular have complained that these conveyances cost public entities tax revenues that would have been generated had the parties engaged in typical real estate transactions.

New legislation to capture drop and swap sales

The current proposal would require that whenever more than 50%  of the ownership interest of an entity owning real property (either directly or indirectly) is conveyed, that the conveyance be reported to the county auditor and the value of the real estate be determined and taxed as part of the sale.

Membership interest transfers have come under increasing scrutiny as property owners perceive that these transfers distort the tax rolls and shift tax burden onto less sophisticated owners. Many property tax levies are for a fixed dollar amount (e.g. a levy to raise $10 Million). So that, as the value of one property increases, other owners pay a slightly smaller amount toward that fixed dollar tax, while the higher value property owner pays a slightly higher amount toward that fixed dollar tax. When one property is kept at a lower value via a membership interest transfer, those other owners continue to pay a higher amount toward that fixed dollar tax.

As news outlets such as Eye on Ohio report on this issue, public opinion is swaying in favor of taxing  these transfers.

As always, would be property investors should consider not only the current tax bill, but the likely tax bill after purchasing a property, and factor that into their purchase price.

Status of legislation

H.B 449 has been referred to the House Ways and Means Committee, on which sponsor Doug Green sits. At this time no hearings have been scheduled on the bill.

As we predicted nearly two years ago to the day, whether this particular bill goes into law or not, the effort to identify, value, and tax these conveyances will continue.

Upcoming tax presentation to REIA

This bill, and membership interest transfers generally, will be a part of our presentation with Hamilton County Dusty Rhodes to the Greater Cincinnati Real Estate Investors on February 6. Learn more about that event and how to sign up for a free ticket here.

Conclusion

The attorneys of Finney Law Firm have achieved literally hundreds of millions of dollars in property tax valuation reductions over the past 15 years.  Let us help you with your tax valuation challenge.  For more information on our property tax valuation practice contact Christopher P. Finney at 513.943-6656.

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