The NH Legislature’s common-sense change to tax law
HB 1656 once again allows real estate owners to protect their property from claims by creditors
On June 21, Governor Hassan signed House Bill 1656, which totally rectifies what for many years has been a serious problem under New Hampshire’s real estate transfer tax – it provides major new opportunities to owners of real property to protect their property from claims by creditors.
As many Hampshire real property owners are aware, if they hold their property in a corporation or an LLC, their property will obtain valuable statutory business asset protections they would not otherwise possess. However, for many years, New Hampshire law has provided that if individuals or entities that own New Hampshire real property in their own name want to transfer this property into a corporation or an LLC in order to obtain these protections, they must pay the real estate transfer tax on the transfer, even though, effectively, the ownership of the property will be the same after the transfer as before. The rate of the real estate transfer tax is a stiff 1.5 percent of real property fair market value.
To my knowledge, the previous real estate transfer tax rule is unique in the United States. It exists only because, many years ago, in an act of late-night desperation to increase state revenues, the Legislature adopted it without consultation with affected New Hampshire property owners or with knowledgeable legal or tax experts. Furthermore, the rule never made the slightest practical sense, since, in most cases, its effect was merely to prevent people from making real property transfers to entities that they would otherwise have made. So the revenue resulting from the rule has always been minimal.
Now the rule has been consigned to the dustbin of history. This is because, under HB 1656, a transfer of New Hampshire real property to a corporation or an LLC will no longer be subject to the real estate transfer tax as long as it meets each of four statutory tests:
• First, the transfer must involve no consideration.
• Second, the transfer must be a mere “change of organization” — for example, a change from that of sole proprietorship or joint tenancy ownership to corporate or LLC ownership.
• Third, as a result of the change, “the assets and liabilities of the transferor immediately preceding the change … and the assets and liabilities of the transferee immediate following the change … [must be] the same.”
• Fourth, at the time of the transfer, the owners of the transferor and those of the transferee and their respective ownership percentages must be identical.
Here’s an example of how HB 1656 will work:
In 2000, John and Mary Doe, as joint tenants bought Blackacre, a parcel of New Hampshire residential real property, for $300,000. By agreement with the seller, they paid the entire real estate transfer tax on the purchase, totaling $4,500. Their parcel has substantially appreciated since 2000 and has a current fair market value of $500,000.
Since 2000, John and Mary have rented the parcel to a series of tenants, and they have always had commercially reasonable liability insurance on it. However, they have always been concerned that an accident might occur on the parcel that, for whatever reason, was not covered by their insurance, or at least not fully covered. Thus, they have always wanted the statutory business asset protections they would obtain if, for example, they were to form a two-member LLC of which they would be equal members and to transfer their parcel into that LLC. But because of the Real Estate Transfer Tax applicable to this transfer — a whopping $7,500 — they have never made the transfer.
Now, with the enactment of HB 1656, they can make the transfer without any concern about the tax, since they will be able to readily meet all of the above four tests. In short, at least with respect to the Doe situation, common sense and fairness have finally returned to New Hampshire.
What if, in your own name or with one or more other individuals, you own valuable New Hampshire real property and, now that HB 1656 has been enacted, you, like John and Mary Doe, want to transfer your property to an entity that will provide you with statutory business asset protections? Should you transfer it to a corporation or to an LLC?
The clear answer is that you should transfer it to an LLC. This is because LLCs provide three quite distinct and powerful types of statutory business asset protections to owners of New Hampshire real property — a “liability shield,” “pick-your-partner” protections and “charging order” protections.
Liability shields protect real property owners from claims by creditors against their personal assets. Pick-your-partner protections protect their right to manage their property. Charging order protections protect their ownership of real property economic rights. Corporations provide a liability shield, but they don’t provide pick-your-partner or charging order protections.
If you currently hold New Hampshire real property in a corporation but want to shield it from creditors with the far greater protections available to LLCs, New Hampshire statutory law, called “statutory conversion” law, will make it easy for you, with no real estate transfer tax liability, to convert your corporation to an LLC. Think about making this conversion.
Attorney John Cunningham, of counsel to the law firm of McLane Middleton, P.A., chairs the Business and Industry Association of NH committee that drafted and updates the New Hampshire Revised Limited Liability Company Act.