Before you sell control of a property owning company
- List every piece of DC real property the company or its subsidiaries own.
- Ask your CPA whether the real estate meets the asset or gross receipts test.
- Get a market value for the real estate on its own, apart from the business.
- Decide whether the property is sold with the company, kept or sold separately.
- Have a DC real estate attorney confirm the current rate and handle the Recorder of Deeds filing.
A deed tax without a deed
When real estate in the District changes hands by deed, DC charges recordation and transfer taxes. Owners who hold property inside a company sometimes assume a sale of the company avoids that, since the company still owns the building.
The economic interest transfer tax closes that gap. When more than 50% of an entity changes hands within 12 months, and the entity holds DC real property, the District taxes the transfer much like a deed.
The filing goes to the Recorder of Deeds, which is part of the Office of Tax and Revenue (OTR).
This covers real property in the District. Property in Maryland or Virginia, and companies based there, follow that state's rules instead.
Does your company count?
Not every company that owns a little real estate is caught. The tax looks at entities where real property is a large part of the picture. Two tests come up:
- Real property makes up 80% or more of the entity's assets.
- More than 50% of the entity's gross receipts come from DC real property.
A consulting firm that owns its office condo but earns its money from client fees may not meet either test.
A company that is mostly a building, or that earns most of its income as a landlord, likely does. Ask your CPA to run both tests on your actual balance sheet and receipts.
The 12 month window
The tax is not limited to a single closing. It applies when more than half of the entity changes hands within 12 months. Selling 40% now and 20% a few months later can add up to the same result as selling 60% at once.
That matters for partial exits, staged buyouts and deals where a partner sells first. Tell your attorney about any related transfers, before or after the main sale.
What it costs
For commercial property, the combined recordation and transfer rate is 2.9% of the consideration for the real property, split as 1.45% each.
A simple example: if $4 million of a company's sale price is for its District building, 2.9% of that is $116,000. On a larger property, the number grows quickly.
Rates change, and the right figure depends on the property and the deal. Confirm the current rate with a DC real estate attorney before you count on any number.
Who pays is a point for the purchase agreement. Settle it in the letter of intent, so it does not become a fight late in the deal.
Value the real estate on its own
The tax is figured on the consideration for the real property. That alone is a reason to know what the building is worth apart from the business.
There is a bigger reason too.
A business and its real estate are valued in different ways. The business is priced on its earnings and a multiple. The property is priced on its rental income and a cap rate. Mixing the two in one number usually leaves money on the table.
Owners misjudge their own real estate often, in both directions. A proper market review is worth doing whichever way you think it will come out. Our valuation guide covers how the business side is priced.
Options that change the tax picture
Owners who hold both the company and its building have more than one way out. Each one changes what is sold and, with it, what is taxed:
- Sell both together. One buyer takes the company with the property inside it. This is where the economic interest transfer tax most often applies.
- Keep the building and become the landlord. The property moves out of the operating company first, and the buyer signs a market rate lease with you.
- Sell the property separately. The building goes to an investor or through a sale and leaseback, before or after the business sale.
Moving property between entities can carry its own DC taxes. Do not restructure on your own to dodge this tax. Ask your attorney and CPA to compare the options on what you keep after all taxes.
Many business buyers cannot or will not buy the real estate as well. Keeping it can widen the field of buyers for the company itself, and turn the building into steady income for you.
The rest of the District paperwork
The transfer tax sits alongside your other DC filings. An asset sale brings the buyer's bulk sale notice to OTR. Any sale of a partnership or LLC brings a final D-30 if the business ends.
Planning all of them together, early, is the surest way to keep your closing on schedule.
If your company owns its building in the District and you want to understand what the business and the property could each bring, send a short request or call (202) 555-0174.