TRANSFER AND RECORDATION TAXES
 
From The Chair
 
From The Editor
 
Beware of Buried Liens: Improvement Liens and Assessments
 
Reviving Extinguished Junior Liens
 
The ALTA 2006 Policies and Endorsements
 
Transfer and Recordation Taxes
 
“The New Construction Law Committee”
 
Book Reviews
 
Recognition of ACREL Members










 


Robert J. Strupp, Esq.
Director of Research and Policy

In the 2007 General Assembly, both the House and Senate considered proposals to impose recordation and transfer tax obligations on the transfer of controlling interests in certain entities owning real property (corporations, partnerships, limited liability companies, limited liability partnerships and certain other unincorporated businesses). The only practical difference between HB 475 and SB 616 was the threshold value of real property held by the transferor entity to be subject to the taxes. The House version was to apply to property valued in excess of $1,000,000.00 and the Senate version to property exceeding $500,000.00 in value. Similar bills have been introduced in recent years with a variety of proposals to use the newly generated funds for educational purposes and land preservation.

As a practical matter, under current law, real property can be transferred without payment of transfer and recordation taxes, or documented recordation in the land records, by transferring the ownership (controlling) interest in the title owner of the property. Studies by the Maryland Department of Legislative Services (2005 Session HB1) suggests that, at the threshold of 1 million dollars, the State would collect in excess of 13 million dollars a year and the counties and municipalities would collect in excess of 45 million dollars in additional transfer and recordation taxes. In the current climate of budget deficits and proposed tax increases, to paraphrase the late US Senator Everett Dirksen, this is “real money”.

The so-called “llc loophole” does more than enable the sale of high rise office towers of Baltimore City, the shopping centers of suburbia and apartment complexes around the State to escape transfer and recordation taxes, it enables investors who buy and sell single family residential property through limited liability entities to not only escape the transfer and recordation taxes, but to escape the detection of land records. Consider the following:

1. A owns 123 Maple Street
2. A creates a limited liability company wholly owned by A – known as 123 Maple, LLC and records a deed from A to 123 Maple, LLC. This transaction, under current law may be exempt from transfer and recordation taxes.
3. A sells his membership interest in 123 Maple, LLC to B for $20,000.00 cash. B now effectively owns 123 Maple Street. Because this was a transfer of the LLC and not the property, there are no transfer or recordation taxes and no deed reflecting the sale.
4. B, a “wholesaler” real estate investor sells the membership interest in 123 LLC to C, a rehabber for $40,000.00. Once again there is no change in the title (123 Maple LLC retains ownership) and no transfer or recordation taxes are collected.
5. C fixes the property, and thereafter 123 Maple, LLC deeds the property to D for $100,000.00. Only in this last transaction is a deed filed and transfer and recordation taxes collected.

What does the chain to title look like. A to 123 Maple, LLC to D. What was lost in revenues in state and local transfer and recordation taxes? Assuming the combined transfer tax to be 2 percent, $1,200.00 was not collected. Assuming a $5.00 per $500.00 recordation tax, another $600.00 was lost, for a total of $1,800.00. Suppose B and C have 10 transactions like this per year, $18,000.00 in revenue, failed to be captured. If there were merely 100 such transactions made statewide in a year, $1,800,000.00 was lost by tax collectors.

As you can sense, the existing law results in the loss of millions of dollars in possible tax collections when real property is transferred by conveying it under the guise of a membership interest or other entity interest. The critical question is whether conveyance taxes are beneficial to State and local governments and their citizens?

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