Record this: General Assembly closes tax dodge
In the world of taxes levied by the Commonwealth, the recordation tax– even after it spiked 67 percent last year– remained fairly obscure. It wasn't until press reports outed rich guys like indicted former Tyco exec Mark Swartz, who used a perfectly legal loophole to save nearly $50,000 on his approximately $17 million purchase of an Albemarle estate, that legislators began to take notice.
Delegate Mitch Van Yahres read the Hook's exposé on Swartz's purchase of the historic Enniscorthy plantation and decided to carry a bill to the General Assembly to eliminate the tax dodge. He wasn't the only one. Delegate Allen Louderback, the 15th District Republican from Luray, promoted an identical bill.
Van Yahres' was rolled into Louderback's HB 2177, and the bill passed the House of Delegates 95-5. On February 17, the Senate unanimously passed the bill to prevent the use of LLCs solely to avoid recordation taxes.
"Now it goes to the governor," Van Yahres says.
When The Hook asked Governor Mark Warner about the loophole last year, he said, "I don't know all the rules on LLCs." But as far as rich guys getting a tax break on million-dollar properties, "That doesn't sound fair," said Warner. "It sounds to me like a corporate loophole that needs to be looked at."
The LLC exemption worked like this when the operators of Monticello bought Brown's Mountain for $15 million and made legitimate use of the loophole.
The nonprofit Thomas Jefferson Foundation 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.
And that's a problem for local governments, which can't collect the recordation taxes that might have yielded hefty sums. The Brown's Mountain sale would have yielded $7,000 for Albemarle, with the balance of $36,000 going into state coffers, according to Albemarle assessor Bruce Woodzell.
Because the LLC loophole allows ownership to transfer without stating a price, the assessor– unaware of a price spike– is other property owners at market value while multi-million dollar properties may be under-taxed.
"I create an assessment based on market value," says Woodzell. "These transactions have no market value."
The LLC exemption does have legitimate uses, such as when an individual transfers property she owns and will continue to own into an LLC. The exemption originally came about because the owner had already paid the recordation tax, and was doubly taxed to transfer it again.
"Finally we were able to amend it" so that it still protects legitimate uses, says Van Yahres.
To prevent the use of LLCs for the sole purpose of avoiding the recordation tax, the new law requires a lawyer to certify the exemption meets code.
"It's a very effective way of eliminating sham transactions," says Chip Dicks, an attorney who represents the Virginia Association of Realtors, which lobbied for the law. "Lawyers are officers of the court, and we're certifying deeds based on our licenses."
Next step: the bill goes to the Governor's desk.
The Hook exposed the loophole in its November 4, 2004, cover story.