General Assembly Moves to Block Increased Taxes on Short Sales

An emergency bill has been introduced in the Maryland Senate and House of Delegates that would specifically prohibit counties from charging additional recordation taxes on short sale transactions above and beyond those charged on traditional home sales. As I am sure many of you are aware, last month several Maryland counties instituted policies to begin charging transfer and recordation tax on any mortgage debt forgiven by lenders in short sales, in addition to the tax already charged on the purchase price.

According to Sections 12-103 and 13-203 of the Tax-Property Article of the Maryland Code, State transfer and recordation taxes must be calculated on the consideration paid in a purchase transaction. With these new policies, Anne Arundel, Montgomery, and Prince George’s Counties decided that the word “consideration” should include any forgiven debt. As you might have guessed, the response from the local real estate community was overwhelmingly negative. This new tax not only caught everyone off guard, but it also added a significant impediment to the already daunting task of getting a short sale approved. For example, in one Montgomery County short sale transaction I was working on at the time (and that had already been approved by the short sale lender), the additional tax would have amounted to more than $4,000! Imagine the lender’s surprise when I called to give them the news. Needless to say, they were not happy, and it probably would have ended the deal. Luckily, the immediate uproar led both Montgomery and Prince George’s Counties to put their new taxing policies on indefinite hold. Anne Arundel County, however, moved ahead and actually began charging this increased tax.

In late January, the Maryland Attorney General’s Office issued an official opinion on the matter. In that opinion, the AG stated that, “While not expressly prohibited…the counties do not have the authority to include debt forgiven by the seller’s lender in calculating the consideration on which the recordation tax will be calculated.” Upon hearing this news, Anne Arundel County Controller Richard Drain stated that they would follow the AG’s opinion and stop charging the additional tax. While it appears that a major crisis has now been averted, State Senators and Delegates feel that it is important to make it absolutely clear that this additional tax is prohibited by Maryland law, and thus the introduction of the emergency bill.

The Maryland Association of Realtors®, however, does not think that this bill goes far enough. While state transfer taxes and recordation taxes would be covered, the bill does not, in its current form, address county transfer tax policies, which counties are able to establish on their own. Because of this possible loophole, MAR has submitted proposed amendments to the bill that would add an additional section expressly barring counties from including forgiven debt when calculating consideration for transfer tax purposes. While Frederick County does not have a separate county transfer tax, it is important that this policy be set statewide to avoid confusion or possible implementation of this extra tax in the future.

For further information on this topic, or for help with other real estate matters, please feel free to contact any of our attorneys.