Sales Tax on Real and Personal Property in Real Estate Transactions

Everyone knows that sales tax isn’t due when you sell a home in Florida, right?  Or is it only sort-of-right?  Or is it only sort-of-right-sometimes-depending-on-XYZ?  Since this is a legal blog, of course it’s the latter.

It is certainly true that the sale of Real Property in Florida is not subject to sales tax.  Real Property is the land and the “fixtures” permanently attached to the land, like a house, air conditioning condenser or in-ground pool.  Personal Property is everything else that isn’t Real Property.  The window treatments?  Yep.  That nice armoire in the entryway?  Absolutely.  The dishwasher?  Errr…probably…it depends on if it’s built-in or not.  The refrigerator?  Probably not.  Anyways, what is important for this article isn’t what does or doesn’t constitute Personal Property vs. a fixture – it is the general rule that the sale of Personal Property is subject to sales tax in Florida, while the sale of Real Property is not.

Most of the time, this isn’t an issue.  Most commonly-used real estate contracts include a section that allows certain items of Personal Property to be conveyed with the Real Property (for instance, take a look at Section 1(d) of the recently-revised FAR/BAR Residential Contract for Sale and Purchase).  If Personal Property is conveyed as part of the sale of Real Property, and the Personal Property is not given an independent value, the transfer is considered to be “incidental” to the home sale and no sales tax is due.  That ends the discussion for the vast majority of sales.  Even if Personal Property is separately valued in the contract, no tax is due if the sale qualifies as “occasional or isolated,” as discussed below.

In some sales, though, very significant amounts of Personal Property are conveyed along with the Real Property.  These “turnkey” sales may include all of the furnishings in a home, all the way down to forks and knives.  A quick detour: What is the best way to describe what Personal Property is being sold?  Can the parties just say “all furnishings” and call it a day?  We don’t recommend it.  When the Buyer thinks that the painting of the Seller’s great aunt Bertha is included in the descriptor “all furnishings” and the Buyer thinks that only furniture is included, you’ve got a recipe for a fight.  If you want great aunt Bertha to continue to rest peacefully, the best practice is for the parties to get together and create a detailed inventory of everything that will be transferred, room-by-room.  If it’s on the list, it stays; otherwise, the Seller keeps it.

So, as long as the transfer of Personal Property is incidental to the sale of the Real Property, and no separate value is stated for the Personal Property, no sales tax is due.  That solves things, right?  Buyers and Sellers can just agree to not separately value the Personal Property, and then avoid the DOR?  Sometimes yes, sometimes no.

Besides the Buyers, the Sellers, and the tax man, a couple of other industries have an interest in the purchase price of property: lenders and title insurance companies.  Lenders will only base their mortgage appraisal on the valuation of Real Property – after all, a house is not likely to “run off” or be sold easily, like a couch may be, so it is a more secure form of collateral.  When Buyers and Sellers have arrived at a purchase price that includes a significant amount for Personal Property, the bank’s appraisal may come in low (remember, they only appraise the Real Property), and the lender’s lending limit may be lower.  As a result, the Buyer may have to make a more significant down-payment, or the bank may require the parties to allocate the Purchase Price between the categories.

Another problem arises with title insurance companies.  They only insure on the value of the Real Property that is being transferred (that they’ve searched and warranted title to), not any Personal Property whose value may be rolled into the purchase price.  If they suspect that a large portion of the purchase price is rightly attributed to Personal Property, they may require the parties to allocate values so that they can insure only on the value of the Real Property.  In either of those cases, the parties reach a bad result: the allocation of a portion of the purchase price triggers the requirement to pay sales tax on the Personal Property transfer.

If that occurs, all is not lost.  The parties may decide that the value of the Personal Property is relatively nominal – we’ll call it Craigslist pricing – resulting in a small tax liability.  Alternatively, if the parties see that this may become a problem on the front end of the transaction, they may proactively enter into a separate contract for the sale of the Personal Property, again at a nominal amount, with the sale contingent on the closing of the Real Property – if that sale qualifies as “occasional or isolated” (review Florida Administrative Rule 12A-1.037 if you want more info on what that means, and want to fall asleep) no sales tax will be owed.  One caveat to this approach: this type of “occasional or isolated” sale is only exempt from sales tax so long as a broker is not involved, so if the parties recognize that this may be required, the brokers should butt out!

To finish up, some take aways:

  1.  DO always describe any personal property being transferred using a specific description of each item to be transferred.  Fail to do so, and the Seller may just keep that painting of Bertha.
  1.  DO NOT itemize the cost of any Personal Property in any sales contract.  If you do, the tax man may be asking your Seller for a check.
  1.  DO try to proactively identify situations in which significant amounts of Personal Property will be transferred, and do have your Sellers and Buyers plan on how they will address that fact from a sales tax standpoint.
  1.  DO have the parties prepare a separate agreement for the sale of Personal Property that identifies the property to be transferred and its valuation if significant property is to be transferred.  And DO remember that the broker can’t be involved in that task if the goal is to avoid sales tax.
  1.  DO NOT pay attention to this blog for commercial transactions – a different analysis is required for those transactions.
  1.  DO always feel free to contact your local real estate attorneys should you have any more questions on the matter.

Sincerely,

Berlin Patten Ebling, PLLC

Article Authored by Daniel Guarnieri, Esq.  dguarnieri@berlinpatten.com

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.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

 www.berlinpatten.com 

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