Realty tax loophole costs state millions

General Assembly

March 14, 2007|By Melissa Harris | Melissa Harris,SUN REPORTER

When Philadelphia-based Resources America Inc. sold the 30-story Alex. Brown Building in downtown Baltimore to a Miami firm last year, they structured the deal in a way that saved them an estimated $2.4 million in city and state transfer and recordation taxes.

In 2002, the Rouse Co. used the same legal method to sell 11 shopping centers in Columbia to a New York company, depriving Howard County and Maryland of an estimated $2 million in tax revenues.

Most big-ticket developers don't exchange real estate in the same way that homeowners do. Instead of buying property, they acquire ownership of a limited-liability company whose only major asset is property. A deed never changes hands, and the exchange of the deed is what triggers the taxes.

For more than 15 years, some Maryland lawmakers have tried to close this tax loophole and set aside the new revenue for school construction and land preservation. But powerful real estate interests have lined up in opposition to the bill and killed it year after year, said Senate Finance Committee Chairman Thomas M. "Mac" Middleton. But now, the Charles County Democrat said, the loophole might become "low-hanging fruit" in tight fiscal times.

The current effort has a host of powerful supporters, including House Speaker Michael E. Busch, Senate President Thomas V. Mike Miller and Gov. Martin O'Malley.

"If in balancing the budget we cut funds to the counties, then the very least we can do is replace some of those funds," said Miller, referring to cutbacks the state will make as it faces a $1.3 billion budget shortfall starting next year.

But Miller would make no assurances about the bill's chances this year in the Senate Budget and Taxation Committee, where the bill has repeatedly died despite passing the House of Delegates at least five times since 1991. The committee's chairman, Sen. Ulysses Currie of Prince George's County, is the bill's sponsor and a hearing before his committee is scheduled for today.

"There is hope this year, but I think maybe we might want to wait and consider it next year as part of a large fiscal package, rather than piece by piece," said Currie, a Democrat who has lead the committee since 2002.

Lined up against the bill are groups such as the Maryland Chamber of Commerce, Maryland State Builders Association and Maryland Association of Realtors.

"This is an old issue," said Ronald W. Wineholt, the Chamber's vice president for government affairs. "Most of the members of the Budget and Taxation Committee have opposed it in past years, and they're still on the committee."

Wineholt said that proponents of the bill are not trying to close a loophole, but impose a new tax.

"Recordation and transfer taxes have always solely been applied to deeds recorded in the courthouse evidencing the transfer of real property," he said. "A business entity is not real property."

At least 10 other states and the District of Columbia have closed the loophole.

States began to act after The Pan American Building on Park Avenue in New York City sold in the mid-1980s for more than $200 million, and the city wasn't able to collect on the sale, said David Falk, a senior fellow at the University of Maryland School of Public Policy, who helped draft a proposal to close the loophole in the early 1990s while working for then-Gov. William Donald Schaefer.

For the years 2001 to 2006, the Maryland Department of Assessments and Taxation has identified more than 200 transactions worth $1 million or more that would have reaped a total of more than $150 million in tax revenues.

Many of the projects are in suburban Washington, but Baltimore-area "controlling-interest" transfers include the Wyndham Inner Harbor and the IBM Building in the city and the Marshfield Business Park in Baltimore County, according to the fiscal note on the legislation.

The state's assessors typically only learn of these large "controlling interest" transactions through newspaper reports, word-of-mouth or their own research, said Laura Foussekis, special assistant to the department's director. The bill would make these transactions a matter of public record.

But Wineholt said that a tax increase would drive real estate investors into other states, where transfer and recordation taxes are far less onerous than in Maryland.

West Virginia, for instance, has not imposed recordation and transfer taxes on transactions in which investors buy a controlling interest in a real-estate venture, rather than transferring the deed outright.

Virginia's tax rates are considerably less than Maryland's. But sellers of properties valued at more than $400,000 would pay about the same transfer and recordation taxes in Baltimore City as they would in Washington, Falk said.

Kathleen Maloney, executive vice president of the Maryland State Builders Association, said that her group understands the aim of the bill is to go after big corporate malls, factories and warehouses, but that mom-and-pop residential builders also would suffer.

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