As Todd mentioned in his blog post earlier this month, the biggest ticket item for closing costs for a real estate purchase in DC can be the transfer and recordation taxes collected by the DC government.
The same holds true for Maryland and Virginia transactions – with the added complication that in Maryland and Virginia, you can also pay a county transfer tax, and the rules and rates vary depending on your county. (See Todd’s post earlier this month about how complicated calculating these taxes can be in Montgomery County.)
I thought I’d sum up some recent changes to the rules on how these taxes are calculated in DC, Maryland, and Virginia for purchases and refinances.
District of Columbia
DC FY 2013 Budget Support Act, which went into effect in 2012, contains two provisions that relate to transfer and recordation taxes.
DC transfer and recordation taxes on the purchase of a cooperative unit – Until 2009 buyers and sellers of cooperative units were not required to pay transfer or recordation taxes in DC. When you buy a cooperative unit, you are not buying real estate per se but rather shares of stock in the cooperative association that owns the building, and you get a "proprietary lease" of the unit itself.
In 2009 DC began requiring the payment of transfer and recordation taxes on the transfer of cooperative units. The FY 2013 Budget Support Act made this requirement even clearer by revising the part of the DC code pertaining to exemptions from recordation tax, eliminating the exemption for deeds that convey an economic interest in residential real property that is owned by a cooperative housing association.
DC recordation tax on commercial refinances – The FY 2013 Budget Support Act clarified that for commercial refinances, recordation taxes will be collected only on the excess of the principal amount of the refinance Deed of Trust (DOT) over the principal balance due on the existing debt under the prior DOT, as long as the prior DOT was exempt from taxation or the taxes due on the prior DOT were paid.
This clarification resolves a dispute within the DC government over whether commercial refinance DOTs should have been taxed at the full amount of the new loan. The exemption from transfer and recordation taxes for refinances of residential properties with fewer than five residential units remains in place.
State recordation tax on an Indemnity Deed of Trust (IDOT) – Previously, Maryland did not charge state recordation tax for an IDOT, so using this form of security instead of a regular DOT was a way to avoid the tax.
Effective July 1, 2012, IDOTs of $1 million or more are taxable at the full amount of the IDOT, with no exemption for the first $1 million. IDOTs less than $1 million are not taxable. The rules for amended and restated IDOTs depend on the date of recordation of the original IDOT and whether the new amount per the amended and restated IDOT is $1 million or more.
For example, where the original IDOT was recorded prior to July 1, 2012, and the new amount is $1 million or more, the IDOT is taxable at the full new amount. If several IDOTs are presented at the same time, they may be aggregated and taxed if the total is $1 million or more if it is determined that the intent of using multiple IDOTs was "to avoid the tax."
Taxes on refinances – Previously, refinance DOTs in Virginia (both residential and commercial) were required to pay a state grantee refinance DOT tax of $2.50 per $1,000 of loan amount on the full amount of the new loan, with the exception that if you were refinancing with the same lender that made the loan being refinanced, you were taxed only on the amount in excess of the amount of the original DOT.
The new state rule, which became effective on July 1, 2012, is that all refinance DOTs are taxed at the full amount of the new loan (even if you are using the same lender) but at a reduced rate, which is $1.80 per $1,000 of loan amount up to $10 million. There is also a county tax, which is one-third of the state amount, so this tax went down from $0.83 per $1,000 to $0.60 per $1,000 as a result of the reduction in the state rate.