November 27, 2007

New Tax Reform Law Will Affect Maryland Real Estate

Holland & Knight Alert
Curtis L. Sano

Effective July 1, 2008, the sale of economic interests in real estate owning entities in Maryland will be subject to recordation and transfer taxes, except in limited circumstances.

On November 19, 2007, Maryland Governor Martin O’Malley signed into law a bill designated as S.B.2, entitled the “Tax Reform Act of 2007.” When it takes effect on July 1, 2008, among other things, it will impose recordation and transfer taxes on certain transfers of economic interests in entities that primarily own real estate in Maryland.

Until now, transfers of economic interests were not subject to Maryland’s transfer and recordation taxes. As a result, real property transactions have often been structured as sales of partnership, corporate or limited liability company interests in order to avoid these taxes, which are significant. For example, for a typical purchase and sale of land in Montgomery County, Maryland, total state and county transfer and recordation taxes, add up to 2.19 percent, which will increase to 2.50 percent, effective March 1, 2008.

The Tax Reform Act of 2007 severely limits the ability to use a common tax planning tool – structuring real estate transactions as transfers of economic interests to avoid Maryland’s high transfer and recordation taxes. Two of the basic criteria for the tax are:

  • real estate constitutes 80 percent or more of the value of the assets of the entity in question and has an aggregate value of at least $1 million
  • more than 80 percent of the ownership interests in the entity are transferred

A link to the text of the law can be found at: The relevant text is found at pages 57-64.

Please contact us to discuss how this new law will affect your upcoming Maryland real estate transactions.

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