Property transfer rules need to be clarified


October 06, 2002|By Jonathan A. Azrael

Many readers have asked whether they can transfer real estate to their children without paying Maryland transfer and recordation taxes. These taxes can total 1 percent of the assessed full cash value of the property. Until recently, court clerks responsible for collecting state transfer and recordation taxes considered gifts of real property to children (and certain other family members) to be exempt from these taxes in accordance with longstanding statutory interpretation established by the attorney general. A new opinion from the attorney general's office dated July 8 has changed that.

Departing from prior policy, the attorney general's office says that the exemptions from recordation and transfer taxes apply only to the extent the children take title subject to or assume an existing deed of trust (or mortgage) on the property.

The opinion, issued by Maryland Assistant Attorney General Julia Andrew, also restricts the exemption from recordation tax on refinancings, where children have been given an interest in a parent's property, but had not assumed the prior deed of trust or mortgage.

The opinion applies to a common scenario. A retired mother wants to refinance her home. The home is subject to an existing deed of trust, securing a loan made to the mother only. The mother does not qualify for the new loan and the lender insists that her children sign for the loan and be put on the deed before the refinancing loan is made. The attorney general's office now says that the exemptions for recordation and transfer taxes on the deed do not apply because the children did not take title subject to or assume the prior deed of trust. The opinion also states that the exemption from payment of recordation tax on the refinance deed of trust would apply only to the extent of the mother's interest in the property. Since the mother transferred title to herself and her three adult children, the recordation tax exemption would apply only to the mother's one-quarter interest.

Attorneys and title companies conducting refinancing settlements are regularly calling local transfer and court clerks' offices before settlement to find out how taxes on the deed and deed of trust are being calculated on intrafamily transfers. Lenders and borrowers are balking when these taxes have to be collected and some refinancings have been canceled or rescinded by surprised and disgruntled homeowners.

While the new opinion from the attorney general's office may be justified by a strict reading of the letter of the law, it appears to elevate form over substance. As the opinion suggests, double taxation could be avoided under current law if the mother were able to qualify for a new loan, had refinanced on her own and taken advantage of the refinancing exemption, and had then transferred the property to herself and her children subject to the mortgage or deed of trust securing the new loan.

Another way to structure the transfer is for the deed from the mother to herself and her children to expressly provide that the children assume the existing deed of trust or mortgage. Then, in a subsequent refinancing, the mother and her children would appear to qualify for the recordation tax exemption.

The statutory exemptions from recordation and transfer taxes need clarification. That's a job for the new General Assembly and governor.

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