The 2013 legislative session brought about some positive changes in the area of taxability of indemnity deeds of trusts (otherwise known as indemnity mortgages), supplemental instruments, and refinance instruments. This new law applies to any of these types of financial instruments recorded on or after July 1, 2013.
Anyone who has ever had to pay recordation and transfer taxes in Maryland knows first-hand how costly it can be to record the mortgages/deeds of trust required to secure repayment of a loan in this State. This is because Maryland is one of the most expensive states in the union, where the average transfer costs adds as much as 2-3% to the transaction costs. Although it varies from county to county ($5.00 per thousand dollars in Baltimore, Howard, and Prince George’s Counties as the lowest ends, and up to $12.00 per thousand dollars for Frederick and Talbot Counties as the highest), this new law will help ease that burden for borrowers, which comes as a much needed relief in these still struggling economic times.
The most notable change is the new legislation that raises the threshold to trigger taxability of indemnity deeds of trusts (or IDOTs). The previous law triggered taxability of an IDOT when the loan being guaranteed was $1 Million Dollars or more. Now, the threshold is $3 Million Dollars. However, it should be noted that a series of loans that are part of the same transaction are considered one loan for purposes of determining the threshold. This means you cannot record multiple IDOTs for a single transaction in order to escape the taxability threshold as the amounts on all of the documents will be calculated together to determine taxability. In addition, taxability is triggered on the amount of the loan whereas the collection of the tax is based on the amount of debt secured by the IDOT. It should also be noted that some counties require specific IDOT Affidavits to be submitted with the recording adding to the complexity of the paperwork for settlement practitioners. These changes can be found in Maryland’s Tax-Property Article § 12-105.
This legislative session has also resulted in new recordation tax exemptions for refinances of commercial property. Previously, this exemption was only available for borrowers refinancing their principal residence. Now, the legislature has expanded the exemption allowing for recordation tax exemptions on commercial properties and other residential properties that are not principal residences. This will allow Maryland borrowers to refinance their investment properties at lower interest rates without being hit by a massive tax bill during recordation of the new mortgage.
In order to qualify for this exemption, you must be the original mortgagor and the tax is based on the difference between the current principal balance (rather than the original loan amount) and the face amount of the new mortgage. This means if someone is refinancing a property where the original principal balance is greater than the face amount of the new mortgage, there will not be any recordation taxes charged. It should be noted that all refinances must be accompanied by a refinance affidavit complying with the requirements of §12-108(e) of the Tax-Property Article. Some counties, like Prince George’s, have their own specific refinance affidavit form which must be used. In addition, this exemption is not mirrored for county transfer taxes in counties (like Prince George’s) that charge county transfer taxes. In those counties, the transfer tax is still based on the difference between the original loan amount and the new loan amount.
Finally, the new law has expanded and clarified the definition of a “supplemental instrument” to include instruments that confirm, correct, modify or “amend and restate” existing IDOTs and other lien instruments. Supplemental instruments are taxable only if the face amount of the supplemental instrument or the amount of debt secured (in the case of an IDOT) exceeds the outstanding principal balance of the existing loan (the same as the refinance tax stated above). Therefore, if the instrument being recorded is only making “non-monetary” changes to the document, then there is no tax. These changes can be found in § 12-101 of the Tax-Property Article.
These new laws bring about a much needed change that will allow for more Maryland borrowers to take advantage of the current low interest rates being offered. Additionally, this will hopefully create a trickle-down effect and alleviate some of the potential foreclosure issues that many Maryland borrowers are facing. By reducing the recordation taxes and expanding the exemption to more types of borrowers and properties, more borrowers will be able to refinance their properties, thereby lowering monthly payments and allowing people to avoid a potential future foreclosure.