New FDOR Ruling May Mean Sales Tax Relief for Real Estate Held in Separate Entities
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The Florida Department of Revenue treats inter-company and other related party use of real estate as a taxable rental for sales tax purposes. This is true even when there is no written lease involved. This has long been a significant downside of holding real estate in a separate entity which for liability purposes is desirable. A recent ruling issued by the Department may provide relief to such situations. The ruling addressed a lease which contained the following terms:
- No reversionary interest to the owner/lessor;
- Transfer of title by deed to the lessee at the end of the lease term;
- The monthly rent was equal to the monthly payments of principal and interest;
- The lessee had the option of early payoff to accelerate transfer by deed; and
- The lessee bore the risk and benefits of changes in the property value.
The Department ruled that the lease was in substance an installment sale and not a taxable lease for sales tax purposes. Persons with intercompany or other related party use of real property can now consider the option of putting such a lease in place. This will permit the limited liability benefits of owning real estate in a separate entity without creating the downside of a taxable lease for sales tax purposes.
For additional details and stipulations, please click here or contact me at 561.620.1718 or dwagner@kaufmanrossin.com.
Daniel Wagner is a State and Local Tax Associate Principal at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.
Without the benefit of any research, some questions are:
If the “lease” is really an installment sale contract, is there any concern that the tenant is building equity in the property which can be attached by its creditors? Also, if the lease term is half complete, can a tenant’s creditor execute on the tenant’s lease rights and buy the property for essentially half price?