Anne Arundel backs down on taxing short sales

State attorney general's office opinion leads to reversal

January 28, 2010|By Jamie Smith Hopkins | jamie.smith.hopkins@baltsun.com

Anne Arundel County said it will no longer tax short sales on more than a home's purchase price, reacting to an opinion from the Maryland attorney general's office Wednesday that the practice isn't supported by state law.

Richard Drain, the county comptroller, said Anne Arundel will collect recordation tax on the sales price, rather than the sales price plus any debt forgiven by the lender. Drain said five homes were taxed at the higher amount, and the money - less than $4,000 total - would be refunded.

In short sales, homes change hands for less than the seller owes, with the lender's permission. The lender can forgive some or all of the difference, though real estate professionals say it's frequently unclear at settlement whether that will happen.

Realtors said the county began collecting on forgiven debt without advance warning this month, though Drain said that had always been the policy. Officials with the Maryland Association of Realtors, who feared other counties would follow suit, cheered the attorney general's opinion and the county's swift reversal.

"Our main focus has always been on the uncertainty this created for buyers and sellers," said Charles Kasky, vice president of legal affairs with the trade group. "We believe we've turned the page on this misunderstanding, and we're very happy."

The American Land Title Association wasn't aware of any other community in the country taxing short sales on forgiven debt. But the attorney general's opinion noted that Washington state had begun doing so and then reversed course a year ago. Closer to home, Montgomery County said this month that it had intended to start but decided to hold off to seek legal guidance.

Though state law does not expressly prohibit counties from applying recordation taxes to short-sale debt forgiven by lenders, nothing in statute or case law suggests that they have the authority to do so, said Bonnie A. Kirkland, the assistant attorney general who wrote the newly issued opinion.

"That is so because that debt forgiveness is a separate transaction from the sale," Kirkland said.

Recordation tax is charged on the balance owed on a mortgage when lenders accept the deed to a property in lieu of foreclosing. But in a short sale, the buyer is a third party who has nothing to do with the debt, Kirkland said.

Debt forgiveness "is between the seller and the lender," agreed Mike Cerrito, a real estate broker in Upper Marlboro who does business in Anne Arundel County. "It's not between the buyer, seller and lender."


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