Controlling Interest Provisions in State and Local Real Estate Transfer Taxes

By Donald R. Dennis, CPA, Oakbrook, IL, and Jonathan M. Cesaretti, J.D., Chicago, IL

Editor: Frank J. O’Connell Jr., CPA, Esq.

State & Local Taxes

Approximately two-thirds of U.S. states, as well as a number of municipalities, counties, and other units of local government, impose a tax on taxpayers when they transfer real property to another party. As a practical matter, a real property transfer tax is typically triggered if a deed is recorded. One of the most common ways for a taxpayer to transfer real estate to a new owner without recording a deed is through the transfer of an ownership interest in an entity that holds title to the property. Given such a loophole, it is small wonder that taxpayers have created entities and engineered transactions in order to avoid this tax.

Beginning with the example of New York in 1986, a number of jurisdictions that imposed a transfer tax now require taxpayers who engage in these types of transfers to pay the tax. The imposition of tax occurs when the transfer is deemed to be an indirect transfer of ownership in real property, even if a deed was not recorded. The jurisdictions that have adopted this approach treat transfers of a controlling interest in a legal entity, such as a corporation and the like, as taxable transfers of real property.

A taxpayer is often deemed to have transferred a controlling interest if more than 50% of the ownership interest in the legal entity is transferred to a new owner. The list of legal entities is usually inclusive and includes trusts and single-member limited liability companies (SMLLCs). Because there is no reference to federal income tax concepts in these statutes, practitioners who are used to treating entities as disregarded for federal income tax purposes are required to regard them for purposes of applying these concepts.

Two Approaches to the Controlling Interest Concept

In most cases, the states that have adopted a controlling interest concept take one of two approaches for determining whether a transfer of a controlling interest represents a taxable conveyance of real property.

States like New York that take a broad approach generally tax transfers of a controlling interest in an entity that owns in-state property. Certain jurisdictions assess transfer tax based on the percentage of the ultimate change in ownership of the underlying real property, while other states that adopt this approach impose tax on 100% of the property’s value regardless of whether there is only a partial change in beneficial ownership of the underlying real property. In consequence, jurisdictions that adopt this approach can and do impose tax in connection with business acquisitions, mergers, stock sales, or other changes in a legal entity’s ownership. This type of approach can be a surprise for taxpayers who are more familiar with the traditional transfer tax concepts.

States that take a more narrow approach tax a transfer of a controlling interest only in situations where the entity being transferred is primarily in the business of owning real estate. Whether an entity is primarily in the business of owning real estate is determined by measuring the entity’s real estate activity against its total activity. There are significant differences among these states in how they determine whether a particular company is subject to the tax. Pennsylvania, for example, imposes tax on the conveyance of real property of an entity that:

  • Is primarily engaged in the business of holding, selling, or leasing real estate;

  • Is 90% owned by 35 or fewer persons; and

  • Derives 60% or more of its annual gross receipts from the ownership or disposition of real estate or holds real property whose value is 90% or more of its tangible assets other than marketable securities as a real estate company (61 PA Code §91.201).

In contrast, Michigan defines a real estate company as an entity owning real property that comprises 90% or more of the fair market value of its assets (MI Comp. Laws §207.523).

One criterion that varies across these jurisdictions is whether the test is applied to the entity’s in-jurisdiction real estate assets or to its total real estate assets. For example, Illinois provides that an entity is presumed to be a real estate company if it owns real property having a fair market value greater than 75% of the total fair market value of all of the entity’s assets (IL Comp. Stat. 200/31-5). In contrast, Chicago (and Cook County) provides that an entity is presumed to be a real estate company if it owns real property in the city of Chicago (and Cook County) having a fair market value greater than 75% of the total fair market value of all the entity’s assets (Cook County Code of Ordinances §74-101).

Practical Considerations

The controlling interest transfer tax provisions present complex issues for business acquisitions, mergers, stock sales, or other changes in a legal entity’s ownership.

A series of transactions: A number of jurisdictions have rules that require taxpayers that engage in a series of transactions over time, each of which would not separately constitute a change in ownership, to treat all these transactions as a single transaction for transfer tax purposes. For example, the District of Columbia provides that multiple transfers of ownership interests made within 12 months will be aggregated to determine whether a transfer of a controlling interest in real property has occurred (DC Code §42-1102.02). New York, however, provides that transfers made by one or more persons within three years are presumed to be related and will be aggregated unless the parties to the transaction can rebut the presumption (NY Comp. Codes R. & Reg. §575.6).

SMLLCs: How do these jurisdictions treat SMLLC subsidiaries that only hold real estate? Assume that real estate assets are held by separate SMLLCs and the properties are located in the District of Columbia. Also assume that the corporate owner of these SMLLCs is acquired by another corporation. In this situation, it is often unclear whether the indirect transfer of the ownership interest in an SMLLC would meet the definition of a real estate company that would subject the underlying real property to the District of Columbia’s transfer tax. The example could be applicable to all states that have adopted a controlling interest transfer tax that is based on the criteria of a real estate company determination.

Valuation consideration: What is the method for determining the amount of tax due under a controlling interest tax? Many states have not addressed how to calculate the tax. Washington provides that for situations where the true and fair value of the real property cannot reasonably be determined, the selling price should be based on the property’s market value assessment maintained on the county property tax rolls at the time of the sale.

State versus local tax considerations: The controlling interest transfer tax provisions under a municipality’s local ordinance are also noteworthy because local transfer tax rates are typically much higher than state rates and because there can be differences between the local ordinance and state rules. For example, the Chicago and Cook County combined transfer tax rate is 0.8%, while the state transfer tax rate is 0.1%. Further, the state of Illinois allows for a deduction against the tax base for any mortgages assumed as part of the transaction, but Chicago and Cook County do not. As mentioned, Chicago’s (and Cook County’s) definition of a real estate company is based on a measurement of real estate activity that is conducted within its jurisdiction, while the state definition is based on the entity’s total real estate activity. The difference in the definitions may allow for some planning opportunity.


Frank J. O’Connell Jr. is a partner in Crowe Horwath LLP in Oak Brook, IL.

For additional information about these items, contact Mr. O’Connell at (630) 574-1619 or

Unless otherwise noted, contributors are members of or associated with Crowe Horwath LLP.

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