Real Property Transfer and Recordation


Maryland economic development agencies offer incentives to encourage and retain business, yet the real property transfer and recordation taxes can chill a company's plans to finance its real estate. (See Property Tax Code of Maryland, §12-103 and §13-203.) There are, however, methods commonly used in Maryland to minimize that transfer and recordation tax liability.

Recordation and Transfer Taxes

The state and each local jurisdiction impose recordation taxes and transfer taxes on the recordation of many documents, including those that transfer an interest in land. Since in Maryland a deed of trust in a real estate secured loan conveys title to the lender's trustees, the recordation and transfer taxes are due when the deed of trust is recorded. The taxes are based on the consideration passing under the document to be recorded; generally speaking, on the amount of the debt secured.

In a refinancing, recordation and transfer tax issues can be relatively straightforward. If the new lender purchases the existing lender's loan (and related documentation), records an assignment of the security, and amends the documents to conform to its requirements, then the debt on record is the same debt (up to the original financing), and new recordation and transfer taxes are only paid on any new money.

Indemnity Transaction

If the original lender is not cooperative, or if the property is not being refinanced, many borrowers use an "indemnity" structure to minimize the recordation and transfer tax. In an indemnity transaction, an entity related to the land-owning entity borrows money and contributes or loans the proceeds of the loan to the landowner. The land-owning entity guarantees the borrower's repayment of the debt and secures its guaranty obligation by an "Indemnity" deed of trust. Because the guaranty obligation is not then due, there is no current debt on which to pay a tax. Although the transaction dictates a certain structure, and careful drafting is needed in order to escape taxation, the indemnity transaction is widely accepted and commonly used.

In two instances indemnity transactions are not used. First, in Prince George's County the taxes are imposed on indemnity transactions as well as on standard financings. Second, the recordation and transfer taxes are due on a deed by which property is acquired. Where the tax is paid on that deed, the purchase money financing mortgage or deed of trust is exempt up to the amount of the transfer deed's consideration. Therefore, if the loan amount does not exceed the acquisition cost, the purchaser can pay the transfer deed taxes and use standard loan documents without the indemnity transaction structure.

Acquisition of Ownership Vehicle Instead of Real Estate

One might also minimize even acquisition transfer taxes by gaining title without a deed - that is, by purchasing the seller's ownership vehicle instead of the underlying real estate. In those cases, to structure ownership in a particular deal to avoid transfer taxes, one must carefully craft the sales contract and review with due diligence all of the property owning structure to screen out the purchase of a troubled property owner.

Each of these methods has been tested and refined over the last two decades as companies seek creative means to limit tax consequences of acquiring and financing real estate.