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Were real estate deals shrewd or evasive?

In his campaign ads on TV, U.S. Rep. Vern Buchanan stresses his modest roots and empathy with the average wage-earner:

"I believe in cutting taxes for working families and small business — the engine of our economy.''

A multimillionaire with vast business holdings, Buchanan cut his own taxes on two real estate deals that experts say were structured to avoid paying more than $300,000 to the federal and state governments.

Shortly after winning the 2006 election, Buchanan bought a medical office building in Bradenton owned by Pointe West Partnership II, whose managing partner was John McKay, former president of the Florida Senate. McKay said Buchanan was a member of the partnership.

On Dec. 18, 2006, Buchanan's V.B. Investments assumed $7,565,000 in mortgages in what McKay acknowledged was the building's sale. McKay said he didn't recall the purchase price but said it was more than the mortgage amount.

Normally, property is transferred from seller to buyer by a deed entered in public records and the payment of transfer taxes — commonly called "documentary stamps'' — that are based on the sales price.

In this case, though, there was no deed from the partnership to Buchanan, and thus no payment of transfer taxes. Instead, the partnership transferred the property into a land trust on Dec. 18, 2006. The land trust then was converted into a new Delaware limited liability company — V.B. Investments — formed just a month before.

Absent a recorded deed, the sale price does not appear in public records. But if Buchanan paid the same $8.4-million as the partnership did in 2004, the documentary stamps would have been nearly $60,000.

"I think if the state Department of Revenue audited this, there would be a high degree of suspicion on this transaction and there well could be doc stamps, penalty and interest that are due and owing,'' said Robert Stern, an lawyer with Trenam Kemker and one of the state's top experts in real estate law.

In Florida, sellers typically pay the doc stamps, though Stern said both parties are liable for payment.

The deal had other financial benefits. By assuming the loans, Buchanan didn't have to pay the substantial costs of getting a new mortgage. He might also save on property taxes.

"Without benefit of a deed and purchase price in the records, the property appraiser has to make his own evaluation of fair market value and oftentimes that can be substantially lower'' than the true value, said Stern, chairman of the Florida Bar's land trust committee.

The property is currently assessed at $7.1-million, with estimated 2008 taxes of $133,000.

Buchanan, in written answers to questions from the St. Petersburg Times, said the transaction "fully complied with the law'' and "was a standard practice in the real estate industry.''

In structuring the deal, Buchanan said, the partnership relied in part on an advisory letter from the Florida Department of Revenue. He gave the Times a copy of the letter dated Jan. 11, 2005 — almost two years before the Bradenton deal — but all names were redacted and the opinion appeared to refer to an entirely different property.

"It wasn't directly on point for the same transaction,'' Stern said after reviewing the letter.

McKay, a developer who recently headed a state tax reform commission, acknowledged the Bradenton deal saved on transfer taxes but, "I wouldn't say there was a negative move.''

"People do that frequently, they transfer stuff around,'' he said.

Even if such transactions are common, Stern said, state revenue officials "could very well have determined that this violated the doc stamp laws.''

"This was a complicated transaction with lots of layers and lots of details elaborately put together,'' he said, "and one of those benefits may have been to avoid the transfer taxes.''

The Ritz deal

The Bradenton deal wasn't the only one that saved a hefty sum in taxes.

In 1999, the developers of a Ritz-Carlton hotel and condos in Sarasota agreed to give Buchanan an interest in the project if he could obtain financing by that Aug. 31. He didn't meet the deadline, the developers arranged their own financing and Buchanan sued.

The case was settled in unusual fashion. In 2002, Buchanan bought a Ritz penthouse for $5-million from a relative of co-developer Robert Buford and sold it back to another Buford relative for $6.35-million just more than a year later.

As the Sarasota Herald-Tribune reported shortly before the 2006 election, the deal was good for both sides. Buchanan got the $1.35-million he originally sought but saved about $260,000 by paying capital gains taxes at the 20 percent rate instead of income taxes at the 39.6 percent rate.

And the developers benefited because potential buyers checking property records would see that a Ritz condo had sold for a record $5-million, helping boost the value of other units in the building.

Accountants, though, questioned the deal. "When a transaction is concocted to avoid tax ... that's a transaction the IRS would be extremely interested in," one accountant told the Herald-Tribune.

Buchanan acknowledged the tax benefit. But the community also benefited, he told the paper, because "my two partners and I held more than 100 charity events up there" in the penthouse.

Were real estate deals shrewd or evasive? 09/20/08 [Last modified: Tuesday, September 23, 2008 5:31pm]
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