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Real Estate Transfer Taxes in Ohio: Targeting The LLC Loophole

The County Auditors Association of Ohio has set its sights on closing the LLC loophole regarding real estate transfer taxes in Ohio. They have proposed a bill to mandate the collection of real property transfer tax and to impose reporting requirements for “the transfer of any ownership interest in a pass-through entity that, directly or indirectly, owns real property.” (Mackenzie Damon, Bill Summary, in Ohio Legislative Service Commission: Bill Analysis, L-132-0940, 132nd General Assembly.)

The LLC Loophole

Generally, Ohio law requires a transfer tax on the sale of real property. And, Ohio law also requires the reporting of sales of real property to the County Auditor. Generally, real estate taxes are based on the valuation of the real property, which is based on the last sale price at which the real property is last reported as sold.

The LLC loophole is a legal means of avoiding both requirements, the transfer tax and the reporting of the sale price, by using an LLC as an intermediary entity. Under the LLC loophole, a property owner (seller) can establish an LLC with the property owner as the LLC’s sole owner/member. The loophole then functions as follows: Instead of the property owner selling the real property directly to the buyer, triggering the transfer tax and reporting requirements, the property owner transfers the real property indirectly to the buyer by (1) first transferring the real property to the LLC, and (2) then selling the LLC itself to the buyer.

Under current law, there is no transfer tax on the transfer of the real property from the property owner to the property owner’s LLC.

Likewise, there is no transfer tax on the transfer of the real property to the buyer because the transaction does not involve the transfer of the real property. The transaction is limited to the sale of the LLC. The real property is and remains in the name of the LLC both before and after the sale of the LLC to the LLC’s buyer until such time as the LLC’s buyer determines otherwise.

And there is no reporting of the sale price to the County Auditor, and so no new, potentially higher valuation of the real property for real estate tax purposes, based on the current sale price.

The Impact of Closing the LLC Loophole

The County Auditors Association proposed bill would close the LLC loophole. The bill would require the property owner (seller) to report the sale of the LLC to the County Auditor as if the property owner had sold the real property directly to the buyer.

The potential impact of closing the LLC loophole on property owners is readily apparent: (1) the collection of transfer taxes, and (2) an increase in real estate taxes, based on the new, potentially higher valuation of the real property for real estate tax purposes, based on the current sale price. The impact on real estate sellers, buyers, and investors would be enormous. The impact on public schools and other entities who receive funds from property taxes would be significant as well. The impact on the Ohio economy cuts both ways. Finally, although it is a legal boon for property owners, Ohio public policy argues in favor of closing the LLC loophole.

At Mallory Law Office, we can help you stay informed of the latest developments in real estate and real estate taxation law. Contact Thomas “Buck” Mallory for counsel, advice, and assistance with your real estate transaction needs.