The entity sale has long been a popular vehicle to indirectly transfer real property in California. However, the California Supreme Court recently changed the economics of such a transfer, deciding that such transfers can be subject to a county-imposed tax known as a “documentary transfer tax.” Although the documentary transfer tax was always a cost to be considered in a direct transfer of real property, buyers, sellers and investors will now need to factor the documentary transfer tax into their pricing for entity transfers.
Under California law, a county may impose a documentary transfer tax equal to $0.55 for every $500 (or a fraction thereof) of consideration paid on each “deed, instrument, or writing” transferring an interest in land. Payment of the documentary transfer tax is a common feature of California real estate transactions and is generally applicable in any direct transfer of real estate. As such, buyers and sellers typically allocate responsibility to pay the documentary transfer tax in their negotiation of the deal terms and document that responsibility in the purchase contract. However, a recent California Supreme Court ruling has expanded the scope of transactions that will trigger documentary transfer tax liability to include entity transfers.
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