December 30, 2024 - Investors and owners face a myriad of items to consider when exiting a real estate deal. With varying rules and regulations, many buyers and sellers (or their advisors) can overlook potential state and local tax (SALT) issues that can seriously impact or delay transaction closings or impose significant taxes on the entity or its investors.

Below are a few of the most common SALT issues that arise when exiting a real estate deal. While it is impossible to plan for every contingency or variation, being aware of the items below goes a long way in being one step ahead of the game.

Bulk sale notification and associated tax clearance process

The filing and compliance process for ensuring that a purchaser of real estate does not inherit the tax liabilities of the seller. Most jurisdictions include the sale of real estate within the parameters of their respective bulk sale laws. In addition, some states may even include the projected income tax due from the transaction as liabilities to be addressed for receiving a tax clearance certificate.

Bulk sale laws coupled with tax indemnification provisions and/or escrow requirements need to be considered both for compliance and contract negotiation purposes as they can have a significant impact on the proceeds received at closing and in the future.

Nonresident withholding

To ensure income taxes are reported and paid by real estate owners residing outside the state where the property is located, several jurisdictions have enacted nonresident withholding requirements on real estate sales. Examples of states which require such withholding include California, Colorado, Georgia, Hawaii, Maine, Maryland, New Jersey, New York, North Carolina, Rhode Island, and South Carolina, among others.

Federal and state differences in computation of tax base

States may utilize key terms from the Internal Revenue Code (the Code) in their computations of taxable income, but their laws and regulations may directly reference and incorporate a prior version of the Code. One common example is California, which has adopted the Code as of January 1, 2015. Another example is Texas, which imposes a state franchise tax that adopts the version of the Code as in effect on January 1, 2007.

Another important difference involves depreciation. Most states have decoupled from federal bonus depreciation rules. Due to differences in depreciation rules, the gain or loss on the sale of real estate at the state or local level may differ from the federal gain or loss and may result in significant state or local taxes.

Apportionment or separate accounting

Apportionment is the exercise of multiplying a business entity’s total net business income by a factor which may consist of a receipts factor or a combination of property, payroll, and receipts factors. Despite the general rule of apportioning net business income, some jurisdictions permit separate accounting or allocation of income and deductions based on the location of real estate.

Elective-pass-through entity taxes

The benefit of state elective pass-through entity (PTE) taxes is that there is no cap on the amount of SALT an electing PTE may deduct for federal income tax purposes, despite the $10,000 individual limitation. Accordingly, any pending transaction involving the sale of real estate should be evaluated for the prospect of required structuring, elections, and payments of the applicable state elective PTE tax.

Transfer and mortgage tax

Generally, any time there is a transfer on the deed to be recorded in the locality where the property is based, there should be a realty transfer tax imposed unless the jurisdiction provides for an applicable exclusion. Many jurisdictions also impose transfer taxes when real estate is transferred between business entities owned by the same owner(s) or for transfers of realty between an entity and its owner(s). When an assumption of debt or refinancing is involved as part of the transfer, the tax bill can be significant.

And even where there is a transfer of an entity interest and not real estate—many jurisdictions have adopted controlling interest transfer taxes that could be applicable, such as: Connecticut, California, Florida, Illinois, Maine, Maryland, Michigan, New Jersey, Pennsylvania, Philadelphia, Rhode Island, New York, and Washington D.C.

Conclusion

The above topics are just a few items that will need careful SALT consideration in advance of exiting a real estate deal. Early discussions with your tax advisors are essential. For additional information, please reach out to your Citrin Cooperman advisor or Jaime Reichardt.