- Florida Sales Tax: Pitfall for Unwary Buyers
Sales Taxes Ensnare the Unwary in Realty Deals
By: Raymond J. Bowie, Esq.
“Don’t tax me. Don’t tax thee. Tax the man behind the tree.”
While of unknown authorship, this little ditty could well have been written by someone at the Florida Department of Revenue attempting to wring some extra tax revenue out of real estate transactions. Constrained by the absence of a state tax on income, Florida revenuers have become quite adept at taxing almost everything else, particularly if the tax burden can be shifted from large constituencies like “me” and “thee” to more remote targets like “the man behind the tree.”
This certainly seems the philosophy behind the way Florida applies sales taxes to certain elements of real estate sales and leasing transactions, which in most other states are exempt from sales taxes.
Real estate transactions are not themselves subject to Florida sales tax. However, sales tax will in some cases be due upon any personal property items that convey with the sale of real estate. And when real estate is leased, sales tax is sometimes due and sometimes not. And if sales tax is due on a rental, many Florida counties, including Collier, also assess their own taxes in addition to the statewide sales tax. Confused? You should be. But since confusion is no defense against failing to pay these taxes, it behooves buyers and sellers as well as landlords and tenants to become educated about these tax liabilities.
Florida’s sales tax is 6% statewide, but counties are allowed the local option of adding their own sales “surtax” of up to another 1.5% on certain sales amounts. Thankfully, Collier County has never adopted a local sales surtax so the sales tax here is fixed at 6%.
Real estate buyers and sellers need to be careful when selling tangible personal property along with real property. Tangible personal property includes things like furniture, appliances, draperies, window treatments, etc. located in residential real estate, as well as business equipment, inventory, trade fixtures and the like located in commercial real estate. Some personal property items, such as standard appliances, are usually included even in the most simple residential property sale.
The general rule is that where the transfer of such personal property is “incidental” to the sale of the real estate or a business, it is not subject to sales tax. Accordingly, it is fine to state in a real estate sales contract that the personal property located in the real estate conveys with the realty, and even to inventory and itemize in the contract all the specific personal property items being transferred. This is, in fact, typical in most sales contracts and will not cause the personal property items to be sales taxed.
What’s not fine, however, is to attach a specific value to the personal property items separate from the sales price stated for the real estate in the contract. Doing that may cause sales tax, collectable and payable by the seller, to be assessed on any specific separate price stated for the personal property being conveyed.
State law fortunately does provide an exemption from sales tax for sellers who sell personal property on an “occasional or isolated” basis. However, this “occasional or isolated sale” exemption may not apply in most real estate sales. That is because to benefit from this exemption, a seller cannot have used a broker or sales agent to help effectuate the sale – and the use of real estate brokers is prevalent in most realty transactions. Hence, in brokered real estate transactions, the parties should avoid stating any specific price or value separately for personal property items.
For this reason, standard form residential sales contracts routinely recite that the stated sales price is allocated exclusively to the real property being sold.
A potential sales tax problem may arise in cases where a property is sold completely or extensively furnished, but where the real estate thereafter appraises for less than the total contract sales price which includes the value of the furnishings. If the buyer is seeking mortgage financing, the low appraisal may jeopardize the buyer’s ability to secure the desired loan amount. Hence, the buyer may be asked by his mortgage lender to sign a contract amendment with the seller in order to allocate a separate price to the personal property, usually amounting to the difference between the contract sales price and the lower appraised value of the real property alone. This creates a dilemma for the parties. The move may solve the potential problem with the buyer’s mortgage financing, but it may also require the buyer to shell out more cash at closing and expose the seller to sales tax liability for the separate value assigned to the personal property. The seller may seek relief under the “occasional and isolated sale” exemption, but if it’s not available, either the buyer or seller may have to pay the sales tax in order to hold the deal together.
Other situations in which the parties may be called upon to separately value the personal property may occur at the real estate closing. Closing agents providing title insurance are not supposed to base the amount of the title insurance on anything other than the value of the real estate being conveyed, excluding any personal property value. Furthermore, when closing agents go to record the deed in the county land records, they must submit to the Florida Department of Revenue a Form DR-219 stating the value of any “unusual personal property” that was included in the sales price. If personal property comprises a large share of the contract sales price, some closing agents may ask the buyer and seller to agree to a separate personal property value, either for title insurance purposes or to complete the Form DR-219 properly. If the parties do this, they again may run the risk that this agreement could trigger sales tax liability.
Generally, if it all possible, it is better for the parties to a real estate sales contract to avoid stating any separate price for personal property either in the sales contract or in any addendum to the contract or in any subsequent agreement. If sales tax is owed, the seller must collect it, apply for a sales tax certificate number, and file a sales tax return – a lot of paperwork for a single transaction.
Fortunately, the Department of Revenue will not go beyond what the actual sales contract states in putting a value on any personal property. Hence, prior to entering into a contract, the seller or his broker can freely advertise the value of the personal property in marketing the real estate. And after the transaction closes, the buyer and seller can each allocate their cost bases between the realty and personal property for their own income tax purposes.
Florida sales tax liability may extend to real estate leasing transactions as well, and it is here that sales taxes have far greater impact than in sales transactions.
As a general rule, sales tax is imposed on all commercial property rentals and on residential rentals for a term of six months or less. Stated another way, sales tax is not due on a residential rental if there is a bona fide written lease to the same tenant(s) for a term of at least six months and one day of continuous duration. But as to commercial property leases, sales tax is always due, no matter what the term of the lease.
In all situations where sales tax is due, each rental unit must be registered with the Department of Revenue and assigned a sales tax number. If an owner or property manager has more than one such rental unit, it is possible to do an “umbrella registration” with the Department including all the properties in a single registration.
Whether the lease provides for it or not, the law requires the tenant in a taxable rental to pay the amount of the sales tax to the landlord based upon the tenant’s gross rents plus other occupancy-related charges. In addition to rent, sales tax is also due on any other charges the tenant must pay to occupy the premises as a condition of the lease, including tenant payments for the landlord’s real estate taxes, insurance premiums or common area maintenance under a net lease. The law provides that the sales tax must be separately itemized and added to rents and other charges due from the tenant. The landlord (or his property manager if delegated by the landlord to collect rents) must collect and remit the tax to the Department of Revenue each time the rent is paid.
In addition to sales tax, many Florida counties also impose their own “tourist development tax” on all residential rentals of six months or less. These tax revenues go into a fund available to the county commissioners to promote local tourism and tourist amenities such as beach renourishment and special events. All taxable properties must be registered with county tax collector, who assigns a tax account number, provides tax return forms and collects the tax either from the landlord or his property manager. In Collier County, the tourist tax is currently 3% of the gross rents, payable on top of the 6% state sales tax.
Failing to register for and pay taxes on real estate rentals may have serious consequences. An owner or manager failing to pay sales tax is liable for interest, stiff penalties, and possible conviction of a misdemeanor. In addition, the county may collect its tourist tax by putting a lien on the property and conducting a tax sale the same as for unpaid real estate taxes.
Florida may not tax “me” or “thee” with a state income tax, but its sales tax reaches out pretty far to tax “the man behind the tree” – the real estate buyer, seller, landlord or tenant in situations where they may least expect it.