Assigning Value to Personal Property and Potential Tax Consequences

As property taxes continue to increase due to escalating property values, it is becoming increasingly common for buyers and sellers alike to try to reduce the real property sales price by assigning value to personal property, thus reducing the amount purportedly paid for the real property, and ultimately (hopefully) the tax assessed value of the property. For example, the parties may have agreed to an overall sales price of $100,000.00, but they prefer that the deed reflect a sales price of $75,000.00 (remember, the property appraiser’s office obtains their initial valuation information from the documentary stamp taxes paid on the deed, from which they can calculate the purchase price). So the parties agree that the purchase price for the real estate will be $75,000.00 (and documentary stamp taxes are paid thereon), and the value of specific items of personal property is set collectively at $25,000.00. In this seemingly perfect scenario, the seller gets their full purchase price and saves documentary stamp taxes by paying taxes on the lower amount. The buyer is happy because the property appraisers’ office is led to believe (through the documentary stamp taxes paid on the deed), that the sales price was only $75,000.00, and thus the initial valuation made by the property appraiser’s office should be that amount.

Here are the problems with this scenario. First, the property appraiser’s office is not bound by the sales price of the transaction. They can consider a number of factors when appraising property and it is not uncommon for them to assign a different valuation. Second, although the parties have seemingly saved money in documentary stamp taxes, by structuring the transaction in this fashion, they could potentially have triggered a sales tax consequence on the value assigned to the itemized personal property. Although the Florida Department of Revenue does not require the payment of sales tax on personal property that is conveyed with real property, this exception may not apply when the parties break out the purchase price and assign specific value to itemized personal property, as the parties did in the above example. So instead of paying documentary stamp taxes on the additional $25,000.00 (which would be an additional $175.00), the parties may have incurred an unexpected sales tax consequence of $1750.00 (remember sales tax is 7% of the sales price for personal property, rather than documentary stamp taxes, which are calculated at .07% of the sales price for real property). If the parties “forget” to remit the required sales tax, there can be substantial penalties.

We advise that you be very careful and not try to get too “cute” when structuring transactions and apportioning purchase price in an effort to try to influence the assessed value of the property being acquired. There may be legitimate reasons to try and do so, but one should always consider the risks involved, as well as any adverse consequences. As always, should you have any questions, we encourage you to consult with your real estate attorney.

Berlin Patten Ebling, PLLC

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

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