October 21, 2008

Florida Amends Statutes On Notifying The Property Appraiser of Ownership Changes

Very recently, Florida amended statutes that will affect the assessment of real property for ad valorem property taxes.

The amendment to Section 193.1556, which became effective
July 1, 2008, requires notification to the County Property Appraiser of any change of ownership or control of real property that is assessed for ad valorem property taxes.

This change is significant because property appraisers in Florida have the authority to reassess the value of property that is subject to ad valorem tax on January 1 of each calendar year. A transfer of the property may and usually does result in a change to the tax-assessed value of the property. Prior to this amendment, there was no requirement that the property appraiser be notified of a change of ownership or control of the legal entity that is vested in title to the real property.

Notifying the Property Appraiser

Section 193.1556 provides:

Any person or entity that owns property assessed under s. 193.1554 or s. 193.1555 must notify the property appraiser promptly of any change of ownership or control as defined in ss. 193.1554(5) and 193.1555(5). If any property owner fails to notify the property appraiser and the property appraiser determines that for any year within the prior 10 years the owner’s property was not entitled to assessment under s. 193.1554 or s. 193.1555, the owner of the property is subject to taxes avoided as a result of such failure plus 15 percent interest per annum and a penalty of 50 percent of the taxes avoided.

In other words, there is a 10-year look-back period during which there can be liability for taxes that would have arisen had the disclosure (and corresponding reassessment) occurred.

The property appraiser must be notified of the change of ownership or control within 60 days of such change. Any person or entity that obtains a controlling interest in any non-homestead property in Florida is responsible for completing the Form DR-430.

You do not need to complete a Form DR-430, however, if:

  1. you are correcting an error;
  2. the transfer is between legal and equitable title; or
  3. the transfer is between husband and wife, including a transfer to a surviving spouse or dissolution of marriage.1

The Department of Revenue has taken the position that notification to the property appraiser is not required if a deed documenting a change of ownership of the property is promptly recorded with the county clerk; however, we have received anecdotal information that some property assessors take a contrary position and believe such notice is required even when a deed is recorded. We understand that a “glitch bill” may be drafted to clarify this point.

Even when legal title to real property is not transferred, the property appraiser must be notified of a transfer of beneficial ownership or when there is a transfer of ownership of the legal entity in title. Such transfers are often referred to as “drop and swap” transactions or as “entity” sales, which involve the sale of membership interests, stock or the like rather than a transfer of “the dirt.”2 The definition of “change of ownership or control” appearing in Sections 193.1554(5) and 193.1555(5) reads as follows:

“…(A)ny sale, foreclosure, transfer of legal title or beneficial title in equity to any person, or the cumulative transfer of control or of more than 50 percent of the ownership of the legal entity that owned the property when it was most recently assessed at just value….”

While the statute clearly defines what constitutes a change of ownership, it is not entirely clear what constitutes a change of control. The statute provides that a change of more than 50 percent of the ownership of the legal entity is considered a change of ownership, but it does not clarify what “cumulative transfer of control” means. This clarification is important, particularly in light of recent upheavals in the US economy as a result of the financial crisis. For example, it is not clear whether the recent takeover and bailout of companies such as Bear Stearns, Merrill Lynch and American International Group will trigger the notification requirement.

Noncompliance May Trigger Penalties

Property owners who fail to notify the property appraiser of change of ownership or control may face financial penalties, including payment of interest on unpaid back taxes, if the property appraiser finds that the property was under-assessed for any year within a 10-year look-back period. The property owner may be subject to the taxes avoided plus
15 percent interest each year and a penalty of 50 percent of the taxes avoided. The property appraiser may record a notice of tax lien on the property of anyone claiming the limitation cap without qualifying. The owner will be named in the notice of tax lien and the property is subject to the payment of all taxes and penalties.

The Florida Department of Revenue has implemented a draft disclosure form known as the DR-430 which may be submitted to comply with the requirements of Section 193.1556. You may obtain a copy of the Proposed DR-430 here. The Department is seeking comments on the draft form and the instructions. Until the Department of Revenue finalizes the form and the instructions, they are subject to change.

Potential Loopholes in the Statute

Questions have been posed to the Department regarding potential loopholes in the statute that would seemingly allow property owners to circumvent the intent of the statute. First, it appears that a staggered change in ownership or control may avoid the requirement of notification to the property appraiser. For example, if there is only a 49 percent change of ownership or control in the first year, and then an additional 2 percent interest is transferred the following year, it appears from the plain language of the statute that the property appraiser does not have to be notified. Second, if there is a change of ownership or control at a holding company level (if there is a holding company), as opposed to at the title holder level, the language of the statute tends to suggest that the property appraiser does not have to be notified.

The Department advised that the statute is so new that these issues have not been resolved at this point, and for that reason, the Department is not willing to take an official position unless a formal Technical Assistance Advisory is sought. A reading of the plain language of the statute tends to suggest that both of the above scenarios should arguably not trigger the requirement to notify the property appraiser; however, there are no guarantees. Such issues should be clarified legislatively or via the rulemaking process.

1 This exemption from the filing requirement applies only to non-homestead residential property containing 9 or fewer dwelling units, including vacant property zoned and platted for residential use.
2 Please note that this amendment has no effect on when payment of documentary stamp taxes is required under Florida law. We have been advised that a bill will be introduced in the next legislative session that will make “drop and swap” transactions or “entity” sales subject to documentary stamp taxation in the same manner as a sale of the “dirt.” A bill on this issue was filed last session and died on second reading. While there is currently no documentary stamp tax ramifications to “drop and swap” transactions or “entity” sales, this is an area that should be closely monitored given the significant state budget concerns at this time.