In last week’s column I talked about using LLCs to mitigate the impact of Amendment D if it should pass. Now it’s time to get more specific about that strategy.
Since Amendment D would provide that property is reassessed when it is sold, the basis of this strategy is never to sell the property. Instead, you form a limited liability company and deed the property to that LLC. Then, instead of selling the property, you sell the LLC, which remains the owner of record of the property.
As I said last week, this doesn’t give you a direct tax advantage. What it does is position your property to potentially have added value when you sell it, because the buyer would have a significant tax advantage.
If you choose to use this approach, I do recommend consulting an attorney and an accountant to make sure you don’t affect your estate plan or create adverse tax consequences. Also, it probably is important to set up the LLC before the election, which doesn’t allow much time to get everything taken care of. If that’s a problem, you could go to the website of the South Dakota Secretary of State (www.sdsos.gov). There you can find forms to set up an LLC. Once you have the basic setup, you can consult an attorney and accountant and make any necessary changes to the company.
Don’t forget to execute and record a deed transferring the property to the LLC. It’s also important to have a separate LLC for each piece of property. Otherwise you can’t transfer an individual piece of property, but the LLC would have to sell it.
I’ve discussed this approach with several attorneys and lawmakers, who agreed that it would be workable. It is certainly possible, even probable, that the Legislature will attempt to eliminate this strategy in the future. It isn’t clear just how they might do so.
It’s also possible that Amendment D, if it passes, won’t be around forever. The current “150%” provision has been in effect for several years, and problems with it are just now starting to become evident. The same is likely to happen with Amendment D. It also might be challenged on Constitutional grounds, as my reading of the South Dakota Constitution is that it requires property tax to be “fair and equal.”
Even if the amendment is questioned, however, it would be in force for at least a few years. A Constitutional challenge would take time. Also, since this is a Constitutional amendment, if it caused problems it could not simply be repealed by the Legislature. It would have to be changed by a vote of the people of South Dakota.
For those reasons, it makes sense to think now about strategies to manage your property should Amendment D become law.
One or two supporters of Amendment D have criticized using LLCs in this way, even implying that such an approach is somehow unfair or abusing the system. Yet, ironically, the goal of this strategy and the goal of Amendment D are essentially the same: paying less in property taxes. It’s hard to see how this can be considered “unfair,” since corporations and LLCs that own real property are taxed at the same rates as individuals.
Using strategies like these to reduce taxes is really no different from claiming all the exemptions and credits to which you are entitled when you file your income tax returns. Taking advantage of a legitimate opportunity to minimize taxes is certainly an appropriate and valid approach, especially when that opportunity is available to almost any property owner.