Debate of ‘D’ turns to LLCs

By Dan Daly, Journal Staff Writer | Tuesday, October 10, 2006

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RAPID CITY — If voters approve Amendment D, would there be a way for property owners to beat the new tax system? Rapid City financial planner Rick Kahler believes there would be.

Amendment D would return real-estate assessments for tax purposes to 2003 levels and then limit increases to 3 percent per year after that. The only time a parcel would be reassessed is when it is sold or improved.

When property is sold, the new valuation would be based on the sale price. In a rising real-estate market, that could be a big jump, especially if the parcel hasn’t sold in some time.

That’s why Kahler — who makes no secret that he opposes Amendment D — has been advising clients to create limited liability companies and transfer their property into the LLCs before the amendment passes.

Kahler said their property would be shielded from future valuation increases when they sell, because they would be selling shares in an LLC, not land or buildings. As a bonus, they could fetch a higher-than-average price because the parcel would come with a built-in property-tax shelter.

“I don’t care if you’re for (Amendment D) or not for it. The action you need to take as a real-estate investor is the same,” Kahler said in a recent conference call with his clients.

Sen. Bill Napoli, the Rapid City Republican who has been spearheading the Amendment D drive, said he, too, has discovered the LLC loophole. But he said it is already being used to hide the value of real-estate transactions. He plans to put a stop to that, regardless of what happens to Amendment D.

“Thanks to (Rick Kahler) and other people like him, we’re going to fix this, and corporations are going to start paying their fair share — with or without Amendment D,” Napoli said.

Napoli said that if he wins re-election, he will introduce legislation to require corporations and LLCs to file a certificate of value when they complete transactions that involve the transfer of real estate.

“This is the really bad part about today’s system. We’re losing millions of dollars in taxes,” he said. “These corporations are skating by without paying their share.”

Napoli and Amendment D supporters say they want to change the state constitution to protect property owners from fast-rising property-tax valuations — and the higher taxes that go with it — in areas where values are rising.

Opponents say the amendment would merely shift the tax burden to young families buying homes, people who move or build larger homes and people who start businesses or make improvements.

Kahler agrees that big assessment jumps can cause serious concerns, especially if you own vacant land in the path of commercial development. Several years ago, landowners along Cambell Street were hit with huge increases. “I certainly can sympathize with that,” he said.

However, Kahler said he believes Amendment D would exaggerate the inequities in the property-tax system, especially if more sales are not being recorded. Under the current system, even land that changes hands without a recorded sale price gets reassessed periodically, he said.

Kahler also wondered how a law to require disclosure would be worded.

Or if a mutual fund buys shares in Wal-Mart, would the La Crosse Street store have to be reassessed? Or if a statewide chain of retail stores is sold, how much of the sale price would be attributed to the business or to each piece of real estate? “I think plugging that hole would be extremely problematic,” he said.

Napoli said he has found cases statewide where commercial property has been woefully under-assessed for years. Even when the sale price is recorded, it often can’t be used as the only factor in reassessing the property, Napoli said.

“Under Amendment D, it would be fair,” he said.

Contact Dan Daly at 394-8421 or dan.daly@rapidcityjournal.com