<I>Hook</I> tightening: Assembly targets LLC tax dodge

Sure, The Hook would like to take credit for two bills in the House of Delegates that close a tax loophole that lets rich guys buy and sell multi-million dollar properties without paying a cent in recordation taxes.

But it can only take credit for inspiring one.

Delegate Mitch Van Yahres has submitted a bill to eliminate the exemption that allowed former Tyco exec Mark Swartz to buy historic Enniscorthy for around $17 million from former New York Islanders hockey team owner John O. Pickett. The two men legally dodged nearly $50,000 in recordation taxes through savvy use of limited liability corporations.

Van Yahres cites The Hook's November 4 cover story, "Dodgeball: A true (real estate) story– and a tax break for the rich and famous" as the inspiration for his bill. "I had somebody call and ask, 'why don't you do something about that?'" he says.

Recordation tax dodges aren't limited to Albemarle County– nor are bills to close the loophole limited to Democrat delegates such as Van Yahres. House Finance Committee Chairman Harry Parrish, a Republican from Manassas, was also interested in closing the loophole.

"He said, 'You do it since you had publicity about it in Charlottesville,'" Van Yahres relates.

Delegate Allen Louderback, the 15th District Republican from Luray, has a bill that's virtually identical to Van Yahres'. His was sparked by a constituent's complaint about a Rockingham County property transfer in the $5 million range in that used the LLC exemption loophole to avoid paying transfer fees.

Louderback aide Gary Frink calls the practice a "scam"– although it's a perfectly legal one.

On September 1 last year, the General Assembly's increase of recordation taxes took effect. Cities and counties quickly followed by hiking their portion of the tax on property transactions. So now in Charlottesville and Albemarle County, on a $200,000 home (if such a creature still exists) with a $150,000 mortgage, the total transfer tax has jumped nearly 100 percent, from $700 to $1,367. Louderback thinks the LLC dodge will become even more prevalent following the increase.

Venerable Monticello used the exemption when it paid $15 million for Brown's Mountain last year– and formed an LLC specifically for the transfer. The seller's representative, John Haskell, transferred the 330-acre property as a gift to TJF LLC in exchange for 100 percent ownership of the LLC. Monticello, in turn, bought Haskell's membership interest in the LLC– not Brown's Mountain per se– for $15 million, and hence no recordation fees.

Of course, saving money for a nonprofit group such as the Thomas Jefferson Foundation may inflame fewer critics than a break for Enniscorthy owner Swartz, who is again standing trial for allegedly defrauding Tyco shareholders of millions.

One potential problem with the new bills is that they could prevent the tax exemptions' originally intention to allow a company or individual to transfer property to an LLC without paying recordation taxes– because they'd already been paid once.

"We can amend it," says Louderback, "and we're going to work on that."

Real estate attorney Bill Tucker is skeptical about whether the original good intent can be preserved. His clients often use the LLC recordation tax exemption to transfer property they own into limited liability corporations. He mentions, for example, a client who transferred a small property into an LLC, and if the owner can't obtain a loan, Tucker may have to transfer it back to the owner's name.

"It's about a $150,000 property, and it would cost about $450 in recording fees," says Tucker.

Van Yahres and Louderback's bills will be read in subcommittee January 19, after The Hook has gone to press. And chances for passage? Unlike many of Van Yahres' minority-position bills, this one seems to enjoy bipartisan support.

"I don't think there's any question," says Van Yahres. "No one likes the idea of loopholes. We're going to close it but try to keep the legitimate aspects."

Mitch Van Yahres