On August 28, 2017 the South Carolina Department of Revenue published Rev Rule #17-5, which updated Rev Rule #15-3 (the “Rev Rul”).
The Rev Rul deals with the application of the deed recording fee on real estate transactions.
The Deed Recording fee is imposed for the privilege of recording a deed in which land is transferred to another person. The fee is $1.85 for each $500, or fractional part of $500 of the value of the realty transferred. The grantor of the property transferred is primarily liable for the fee with the grantee being secondary liable.
Single member limited liability companies are often used by purchasers of real estate to hold title to real property. A single member LLC provides liability protection to its member and importantly keeps its individual member out of the chain of title for environment liability purposes.
While single member limited liability companies are recognized as separate and distinct legal entities for virtually all state and federal law purposes, they are treated as “disregarded entities” for state and federal tax purposes. A disregarded entity is an entity that is deemed not to exist for state and federal tax purposes. Thus, when a single member LLC sells real property the sale is treated as the sale of the property by the single member.
Clearly, when a single member LLC sells real property to a third-party and as part of the sale the deed is recorded by the County Register of Deeds, a deed recording fee is due and payable. But what happens if instead of selling real property the member of the single member LLC sells its membership in the LLC to the third-party. The transaction is the sale of an item of personal property not real property and as such the deed recording fee should not apply. Further, title to the real property will remain in the LLC and no deed will be recorded (remembering that the deed recording fee is on “the privilege of recording a deed”).
The Department of Revenue in Rev Rul #17-5 seems to take a position contrary to the position stated above. The Department notes that:
Written instruments whereby a single member transfers its interest in the SMLLC [single member LLC] to another person are treated as if the realty were transferred from the single member to the other person if the SMLLC is ignored for all tax purposes under the provisions of [that portion of Title 12 of the Code relating to single member LLCs being treated as disregarded entities]. As such, the application will depend on the facts and circumstances of the transfer and on whether the single member selling the interest is an individual, partnership, LLC, trust or corporation and whether the person purchasing the interest, the new single member, is an individual, partnerships, LLC, trust or corporation.
As noted previously and as referenced by the Department, single member LLCs are treated as disregarded entities for all tax purposes. The deed recording fee is a “fee” not a tax. As such, the fact that a single member LLC is a disregarded entity for tax purposes is irrelevant. Additionally, the deed recording fee is “imposed for the privilege of recording a deed.” When a membership interest in a single member LLC is sold to a third-party no deed is recorded.
So where are we? Notwithstanding the confusing language used by the Department as set out above, the Department has clearly stated that the deed recording fee is not applicable until the deed is recorded. It is also clear that if a taxpayer attempts to pay the deed recording fee in conjunction with the sale of a membership in a single member LLC that owns real property that the County Recorder of Deeds’ office will not accept the check because there is no deed being recorded. Therefore, until the law is changed or the Department’s position is further clarified, taxpayers transferring a membership in single member limited liability companies owning real property are not subject to the deed recording fee.