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Jeff Baskies: Beware of Ad Valorem Tax Malpractice Trap when

Transferring Clients’ Florida Non-Homestead Real Property to LLCs &

Trusts

“A very recent Florida 3

DCA opinion, highlights a ‘new’ risk associated

with transferring clients’ Florida non-homestead residential real properties

to LLCs or trusts – such transfers may trigger a significant increase in

annual ad valorem property taxes. The increase in ad valorem taxes

comes from the change of ownership causing the clients to lose their built-

up non-homestead, 10% ad valorem residential property tax cap benefit

(the benefit of their ‘Assessment Limitation’).

This new case highlights how very standard and maybe even ‘typical’

advice (e.g., ‘You should transfer that Florida rental property you own into

an LLC to protect your other assets in case of a slip and fall on the

property.’) might lead to an unintended but quite costly consequence – a

doubling or more in ad valorem real property taxes in the year following the

deed and then a much higher base for annual assessments annually

following the loss of the Assessment Limitation.

Advisors should be aware of this issue (highlighted by this new case and

the 3

DCA’s decision) to ensure they do not give advice that unwittingly

costs their clients a huge increase in ad valorem taxes – to make sure they

do not fall into this clear malpractice trap!

Jeff Baskies provides members with commentary that examines the “hot

off the presses” case of S and A Property Investment Services, LLC v

Pedro Garcia et al (Miami-Dade County Property Appraiser) (FL 3

DCA

case No. 3D22-835, issued March 15, 2023).

Jeffrey A. Baskies, is a Florida Bar board certified specialist in Wills,

Trusts, and Estates law. He practices at Katz Baskies & Wolf PLLC, in

Boca Raton, FL, a boutique trusts & estates, tax & business law firm. Jeff is

a fellow of the American College of Trust and Estate Counsel and a

frequent LISI contributor. In addition to over 150 published articles, he is

the successor author of the treatise: Estate, Gift, Trust, and Fiduciary Tax

Returns: Planning and Preparation (West/Thomson Reuters 2013-2021).

He can be reached at www.katzbaskies.com.

Here is his commentary:

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EXECUTIVE SUMMARY:

Many advisors - including out of state advisors with clients in Florida - know

that Florida homestead property attracts myriad benefits (including

potentially very significant ad valorem tax benefits – the 3% per annum

Save Our Homes (‘SOH’) tax increase cap) and proceed cautiously before

transferring homestead properties (to LLCs, trusts or otherwise).

Many advisors - including out of state advisors with clients in Florida - may

also know that Florida has significant documentary stamp (“doc stamps”)

taxes (approximately $7,000 per $1 million of consideration), and that

funding real property into trusts and/or LLCs may trigger doc stamps.

However, generally, it is well known that there are certain exceptions

allowing funding of trusts or LLCs without triggering doc stamps, for un-

encumbered properties.

A very recent Florida 3

DCA opinion (as noted it just came down March

15, 2023 and is not yet final), highlights a “new” risk associated with

transferring clients’ Florida real properties to LLCs or trusts – loss of the

built-up non-homestead, 10% ad valorem residential property tax cap

benefit (the Assessment Limitation). While this risk has been around since

2009, and so it isn’t really ‘new”, it has garnered much less attention than

the homestead SOH exemption, as it is a 10% cap that applies only to non-

homestead properties (such as vacation homes, secondary residences,

rental properties, commercial properties or vacant land). However, as

Florida property values seem to be rising quite rapidly, tripping up the 10%

Assessment Limitation is still properly considered a primarily “new” issue.

S and A Property Investment Services, LLC v Pedro Garcia et al highlights

how “typical” advice (e.g., “You should transfer that Florida rental property

you own into an LLC to protect your other assets in case of a slip and fall

on the property.”) might lead to unintended but quite costly consequences.

Advisors of Florida clients (or advisors of clients who own Florida real

properties) should be aware of this decision to ensure they do not fall into

this malpractice trap.

FACTS:

In 2000, Sylvester and Angela Anderson purchased a non-homestead

property in Miami (the “Property”), as tenants by the entireties (“TBE”). In

2015, they established S and A Property Investment Services, LLC (the

“LLC”) - Angela owns 51% of the LLC while Sylvester owns 49%.

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In June of 2019, in what might be considered a fairly standard asset

protection plan, the Andersons deeded the Property to the LLC, to insulate

themselves from any personal liability from owning the Property

personally/directly. There was no consideration for the transfer to the LLC

(which means the deed was just to fund the LLC and not to transfer

interests in the LLC to anyone other than the Andersons and also the

property was not encumbered at the time of the deed).

While a homestead property transfer could have triggered a loss of the 3%

SOH cap benefits, this was not the Andersons’ homestead property.

However, please be aware that the 3% annual cap for homestead property

is not the ONLY Florida ad valorem tax cap for real property.

There is also a 10% per annum increase cap on non-homestead residential

properties (the Assessment Limitation identified herein). And that was the

issue in the case, because prior to funding the LLC, the Andersons enjoyed

the benefit of the 10% Assessment Limitation cap for non-homestead

residential property on the Property. But once they funded the LLC in

2019, the Property Appraiser for Miami Dade county re-assessed the

Property at its then full, “just value” (the fair market value as determined by

the Property Appraiser without regard for the built-up Assessment

Limitation – thus ignoring the prior10% cap on increases in value.

Said differently, in the year after the deed to the LLC, the Property

Appraiser removed the 10% property tax cap limitation the Andersons had

enjoyed, and increased the taxes for the LLC. Per the decision, the

Property Appraiser’s assed value of the Property rose from $104,023 (with

a 10% per annum cap on increases) to $273,409 in 2020, causing a

160%+ increase in property taxes for the same Property in 2020.

The LLC appealed this tax increase to the Value Adjustment Board (“VAB”)

challenging the removal of the 10% Assessment Limitation cap. The VAB

ruled for the property appraiser.

The LLC then filed a complaint in circuit civil court adverse the Property

Appraiser. Via cross-motions for summary judgment, the Andersons argued

(by affidavit of Angela) that the funding of the LLC was a mere transfer

“between legal and equitable title” and thus was not a “change of

ownership” which is a pre-requisite to the right to re-assess the property

under FS 193.1554(5). After an April 18, 2022 hearing on the competing

motions for summary judgment, the court quickly issued a summary

judgment in favor of the Property Appraiser (on April 26, 2022). The trial

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court held that nothing in the deed or in the LLC’s operating agreement

indicated that the Andersons retained equitable title in the Property. That

summary judgment was appealed.

As the 3

DCA recited, FS 193.1554(3) provides that any change resulting

from the annual assessment of a non-homestead residential property is

capped at 10% of the assessed value of said property for the prior year –

that’s how the Assessment Limitation works. Further, the property will

retain this 10% Assessment Limitation so long as the property does not

undergo a “change of ownership or control” as per FS 193.1554(5), but if

there is a change of ownership or control, then the property “shall be

assessed at just value as of January 1 of the year following such change in

ownership and control.” FS 193.1554(5).

That statute contains 4 exemptions, and the one concerning in this case

was this: “There is no change of ownership if …the transfer is between

legal and equitable title”. FS 193.1554(5)(b).

To support their argument that there was no change of ownership in this

case, the Andersons cited to two doc stamp cases: Crescent Miami Center,

LLC v. Fl Department of Revenue, 903 So. 2d 913 (Fla. 2005) and Kuro,

Inc. v State Department of Revenue, 713 So. 2d 1021 (Fla 2d DCA 1998).

Those cases support the position that a transfer of real property between a

grantor and an LLC that is wholly owned by the grantor, absent any

exchange of value and any mortgage, is considered without consideration

and thus exempted from doc stamps under FS 201.02(1).

The Andersons asserted their transfer via deed to their LLC was essentially

identical to the transfers in those Crescent Miami and Kuro, in which it was

held in a transfer to an LLC wholly owned by the grantor the beneficial

ownership remained unchanged.

The 3

DCA noted that Crescent Miami and Kuro dealt with doc stamp

liability under a different statute - F.S. 201.02, which taxes situations when

there is a “purchaser” and “consideration” which is different from the inquiry

under FS 193.1554(5)(b), which simply addresses a “change of ownership”.

The court found the deed from the Andersons as TBE to the LLC (even

though owned 100% by the Andersons) was a change of ownership. The

LLC is a legal entity and it is separate and distinct from the individual

owners prior to the deed to the LLC.

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Finally, the Andersons urged the court to find that the deed was merely a

change from “legal and equitable title” (falling into the exception in FS

193.1554(5)(b)). They asserted legal title went to the LLC, but they

retained beneficial title.

You could give the Andersons an A for effort but ultimately their argument

(at least thus far) failed.

The 3

DCA stated that in its view the “Taxpayer’s argument

misapprehends the effect of a quitclaim deed, Florida LLC law, and

equitable ownership.”

With language like that, you know the holding wasn’t going to go well for

the Andersons, and it did not.

COMMENT:

Lessons can be gleaned from this decision.

First, while the 3% SOH/homestead ad valorem tax cap gets the bright

lights and a lot of press, don’t sleep on the 10% Assessment Limitation.

Especially in periods of exponential property value increases (as we’ve

been experiencing in Florida), even non-homestead properties may have

significant built-up ad valorem tax Assessment Limitations. Planners must

be aware of the cost to clients if those limits are lost – before clients fund

LLCs or trusts or other entities with their non-homestead Florida residential

real property.

Second, planners must also be careful of knee-jerk asset protection

planning or probate avoidance planning. For clients who may live and own

secondary or rental properties or for non-Florida-resident clients who own

non-homestead properties (whether they be vacation properties, rental

properties or some other type of property), reflexively advising some

change of ownership can be catastrophic (tax-wise). Instead, planners

must be aware of the 10% Assessment Limitations that may apply to such

properties and account for them before deeding properties to trusts, LLCs

or other structures.

For clients funding revocable trusts, their deeds to revocables trust should

not be an issue. Thus, especially for non-Floridians transferring assets to

revocable trusts to avoid probate, this holding should not alter good advice

or planning.

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But this case is a cautionary tale for advisors who hear “I have a rental

property I own” and reflexively respond “Shouldn’t we put that into an

LLC?” Go slowly and fully understand the costs.

Third, transfers to irrevocable trusts, Limited Partnerships, LLCs or other

business entities fall into this potential malpractice trap, so please be sure

you do not.

Fourth, although not expressly part of the 3

DCA opinion, the logic of S

and A Property Investment Services, LLC v Pedro Garcia et al may also

apply to situations where clients move to Florida and seek to apply for a

homestead SOH exemption. FS 193.155 is the “save our homes” or SOH

3% homestead ad valorem tax cap statute. FS 193.155 states that

“Property receiving the homestead exemption after January 1, 1994, shall

be assessed at just value as of January 1 of the year in which the property

receives the exemption ….” (emphasis added) Thus, it would appear that

any pent-up benefit of the 10% Assessment Limitation is forfeited for a

client who perhaps owned a Florida vacation property that she or he

decides to move into as a primary residence, if such client applies for a

homestead exemption.

Again, this is a potential trap for the unwary and should be considered and

understood. In the long run, the benefit of the 3% per annum cap may well

exceed any lost benefit from forfeiting the 10% Assessment Limitation, but

it is best to consider such and discuss it with your client before the client

seeks a homestead exemption.

Finally, although it was not expressly addressed in the Opinion, it is fair to

wonder if the 3

DCA may have reached an alternate result if the

ownership of the LLC by the Andersons was identical to their ownership of

the Property – before it was deeded to the LLC. Again, the facts in S and

A Property Investment Services, LLC v Pedro Garcia et al were: the

Andersons owned the Property 100% as tenants by the entireties but they

owned the LLC 51% by Angela and 49% by Sylvester. The lack of identity

of ownership may have undercut the Andersons argument to apply the

exception in FS 193.1554(5)(b) – the Andersons argument that funding the

LLC was a mere transfer between legal and equitable title.

If clients create an LLC and own it in the exact same proportions as they

own the property they deed into the LLC, perhaps they can argue for the

application of the exception in FS 193.1554(5)(b), arguing there was a

mere transfer between legal and equitable title.

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However, in its Opinion, the 3

DCA did not say there was an exception for

transfers to LLCs, and the 3

DCA did state that LLCs are separate entities

from their owners. Remember the 3

DCA stated: “Taxpayer’s argument

misapprehends the effect of a quitclaim deed, Florida LLC law, and

equitable ownership.” So that language could still be concerning, even

while one may wonder if identical ownership would have led to a different

result.

To be safe, however, until it is made clear that having identical ownership

will in fact avoid a revaluation and not cause a loss of the Assessment

Limitation, it seems prudent to be careful before tempting fate with such a

deed to an entity. Yet, if one were contemplating funding a property into

an LLC that had a built-up Assessment Limitation benefit, certainly a phone

call to the Property Appraiser’s office would be in order.

It would be interesting to know if a transfer to an LLC with identical

ownership is exempt from the revaluation.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE

DIFFERENCE!

Jeff Baskies

CITE AS:

LISI Asset Protection Planning Newsletter #433 (March 20. 2023)

at http://www.leimbergservices.com Copyright

2023 Leimberg Information Services, Inc. (LISI). Reproduction in Any

Form or Forwarding to Any Person Prohibited Without Express

Permission. This newsletter is designed to provide accurate and

authoritative information regarding the subject matter covered. It is

provided with the understanding that LISI is not engaged in rendering

legal, accounting, or other professional advice or services. If such advice

is required, the services of a competent professional should be sought.

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Statements of fact or opinion are the responsibility of the authors and do

not represent an opinion on the part of the officers or staff of LISI.

CITES:

S and A Property Investment Services, LLC v Pedro Garcia et al (Miami-

Dade County Property Appraiser) (FL 3rd DCA case No. 3D22-835, issued

March 15, 2023). (The decision is not yet final and the author does not

know if there will be a request for rehearing or appeal); : Crescent Miami

Center, LLC v. Fl Department of Revenue, 903 So. 2d 913 (Fla. 2005); and

Kuro, Inc. v State Department of Revenue, 713 So. 2d 1021 (Fla 2d DCA

1998).