On December 19, 2008, the Michigan Legislature amended the State Real Estate Transfer Tax Act .  The amendments are intended to close a perceived loophole that allowed taxpayers to avoid paying transfer taxes on transfers of real property by first conveying the real property to an LLC and then selling the LLC membership interests.  Governor Granholm signed the bill wiich is now Public Act 473 of 2008.

Expanded Application to Real Property Holding Companies:  PA 473 applies to contracts for the transfer or acquisition of controlling interests in entities meeting both an ownership test and an asset test.

            Asset Test:   PA 473 applies only if real property comprises 90 percent or more of the fair market value of the assets of an entity.  The Act purports to require that valuation of the entity's assets is to be determined under generally accepted accounting principles.  If the asset test is not satisfied, the transfer tax will not apply even if a controlling interest is transferred.

            Ownership Test:  Only contracts for the transfer or acquisition of a "controlling interest" in a covered entity will be subject to the transfer tax.  A "controlling interest" is a greater than 80 percent ownership interest in (1) the stock of a corporation by value, (2) the capital and profits of a partnership, association, limited liability company, or other unincorporated business, or (3) the beneficial interest in a trust.

Retroactive Effect: The amendments adopted by PA 473 are retroactive to January 1, 2007.  PA 473 is not clear on how the State may enforce this retroactive provision or whether taxpayers may have any obligation to report such prior transactions.

Payment of Tax :  PA 473 is ambiguous on when or how to pay the transfer tax.  Under the previous version of the State Transfer Tax Act, the tax was imposed on the recording of only two classes of instruments: (i) a contract for the sale or exchange of property or (ii) a deed or other instrument of conveyance.  PA 473 adds a third category:  contracts for the sale of a controlling interest in an entity that meets the asset test.  It is not clear, however, that the Michigan Recording Act permits a contract of sale of an entity to be recorded.  PA 473 also adds another provision that requires the tax, to the extent imposed by the State Transfer Tax Act, to be paid to the local county treasurer not later than 15 days after the transfer of a controlling interest in a covered entity.  This provision is not consistent with the provisions requiring payment of the tax on recording. Instead, it may impose the tax without regard to whether any instrument is actually recorded.

Exemptions:  PA 473 adds some new exemptions to the State Transfer Tax.  These include: (1) a transfer to dissolve the entity where the transfer of the property to owners or a creditor is necessary, (2) a transfer from an LLC or partnership to its members or owners, respectively, if the interests are held by the same owners in the same proportion as the proportion prior to the transfer, (3) a transfer of a controlling interest if the transfer would be exempt if transferred by deed between the same parties, and (4) a transfer in connection with a reorganization where the beneficial ownership is unchanged.

Tax Rate: The tax rate remains unchanged.  The rate is $3.75 for each $500.00 or fraction of $500.00 of the total value of the property being transferred.

County Real Estate Transfer Tax Unaffected:  PA 473 does not address the county real estate transfer tax, which continues to apply to transfers of real property in which a deed is recorded.  The county transfer tax generally is imposed at $.55 for each $500.00 or fraction of $500.00 of the total value transferred.