More Confusion Surrounds Short Sales As Maryland Municipality Clips Consumers For Additional Recording Taxes On Forgiven Debt

In Anne Arundel County, Maryland, The Baltimore Sun reports:

• The real estate industry is up in arms about an Anne Arundel County decision to collect taxes on certain types of home sales based not on what the buyers paid, but on what the sellers owed on their mortgages as the deal was struck. What's at issue are short sales, which are homes that change hands for less - sometimes far less - than the balance due on the loans. The county policy may be unique in the country, according to the American Land Title Association, which represents companies involved with home sale settlements.

***

• Anne Arundel County said it is charging its recordation tax of $3.50 for every $500 on the sales price plus any forgiven debt.(1) If the lender has indicated that it will go after the seller for the remainder owed, then the county will tax just the contract price, as it does with regular home sales. Richard Drain, the Anne Arundel County controller, said it isn't a new policy and the county is simply following state law. [...] Drain said the county's attorneys agreed last week that forgiven short-sale debt is taxable.

***

• A complicating factor is that it is often unclear at the settlement table what lenders will do about unpaid debt. They frequently don't issue the sort of documentation the county wants as proof that they will seek repayment from the borrower - a promissory note, for instance - but also don't formally let the borrower off the hook. "They say, 'I'll allow the sale to occur,' but they reserve the right to chase the seller for the deficiency," said Andrew Levy, executive vice president and general counsel for Capitol Title Insurance Agency in Crofton.

• Drain said the county would accept taxes on the fair market value instead, but only if the parties provide proof, such as a recent appraisal, along with a hardship letter from the seller to show financial difficulty.

For the story, see Arundel tax move angers real estate industry (County taxing forgiven debt in short sales).

Thanks to Bill Collins of Crossroads Abstract, Rochester, NY for the heads-up on this story.

(1) This confusion regarding charging recording taxes/documentary stamps in short sale transactions is not unique to Anne Arundel County, Maryland. At one time, the State of Florida operated with the same belief that debt forgiveness should be considered in the recording tax calculation, as evidenced by this informal letter issued by an employee of the Florida Department of Revenue. To their credit, the Florida DOR subsequently receded from this position by clearly stating, among other things, that:

• The cancellation of all or a portion of the remaining amount of debt after receipt of the proceeds remaining from the purchase price is not part of the taxable consideration in a short sale transaction since the seller’s debt to the lender was incurred in a prior, unrelated transaction.

See Florida Department of Revenue Technical Assistance Advisement No. 09B4-001 Documentary Stamp Tax – "Short Sales" of Florida Real Property, Section 201.02(1), F.S.