Did you know… that Montgomery County has changed how it will tax transfers from Federal entities?
The new rules apply to transfers from HUD, Fannie Mae, Freddie Mac, the FDIC and other Federal entities. Because these entities are generally exempt from local taxes, these new rules can create some unexpected results. You should understand how the new rules work before you draft a contract for a client buying from a Federal entity.
The Montgomery County Department of Finance provided some examples of how this new rule will work which are summarized below. You can read the full memo from the County here.
For a first time homebuyer, if the contract is silent regarding who pays transfer and recording taxes, under existing Maryland law, transfer and recording taxes are all paid by the seller. So, if a first time homebuyer buys from a Federal entity in Montgomery County and the contract is silent about who pays transfer and recording taxes, the deed is exempt from transfer and recording taxes, because the County is not taxing the Federal entity. If that same first time homebuyer financed that purchase and a mortgage or Deed of Trust is recorded along with the deed, however, the Deed of Trust is fully taxable for recording tax. Because no transfer and recording taxes were paid on the deed, the Deed of Trust does not enjoy the purchase money exemption that it would in a normal transaction.
For non-first time homebuyers, if the parties agree to split transfer and recording taxes equally, as is customary, the Federal entity will not pay its half of the transfer and recording taxes on the deed, and the buyer will enjoy the purchase money exemption only in the amount of consideration that was taxed on the deed. So, in a $300,000 purchase with a $240,000 loan, in a normal transaction where the seller is a non-exempt individual, the buyer and seller would split $300,000 worth of transfer and recording taxes for the deed, and the buyer’s Deed of Trust would be fully exempt from recording taxes because of the purchase money exemption. In the same transaction, if the seller is a Federal entity, the buyer would pay $150,000 worth of transfer and recording taxes on the deed and the Federal entity would pay nothing. Because only $150,000 worth of transfer and recording taxes were paid on the deed, the buyer’s Deed of Trust will only enjoy $150,000 worth of purchase money exemption and the buyer would pay an additional $90,000 worth of recording taxes for the Deed of Trust.
For more examples see the memo linked above. And don’t hesitate to call the lawyers listed in the side bar with any questions.
For more information regarding our Residential Real Estate Settlements Group or our general real estate transactions and litigation practice, please contact the Group Chair at 301-230-6574 or firstname.lastname@example.org.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.
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