- February 22, 2008
- All Issuing Offices Conducting Business in the State of Maryland
- New Maryland Tax on Transfer of a "Controlling Interest" in a "Real Property Entity"
Please be advised that as a result of last year’s special legislative session, the Maryland General Assembly has effectively closed a loophole used by many investors and commercial property owners to avoid paying recordation and transfer taxes when property is sold through an entity ownership purchase.
The relevant part of the Tax Reform Act of 2007 becomes effective on July 1, 2008, in which each transaction involving the transfer of a "controlling interest" in a "real property entity" will now require the payment of all applicable recordation and transfer taxes regardless of whether or not a deed is executed. Depending on the county in which the real property is located, the aggregate tax can vary from approximately 1.2% to 3% of the "consideration payable" for such transfers. The following information may help you when handling these transactions:
A "real property entity" is any type of entity or trust that directly or beneficially owns real property in Maryland if that real property (1) constitutes at least 80% of the value of its assets, and (2) has an aggregate value of at least $1,000,000. The value of the real property is its full value without any reduction for the amount of any mortgage, deed of trust, or other lien against it. Ownership of real property includes a leasehold with a term greater than seven years, but does not include (a) a lease of seven years or less, or (b) a security interest in real property, such as mortgages and deeds of trust.
Exclusions: An entity is not a "real property entity" if its real property is entirely subject to agricultural use assessment, other than portions for the homestead and commercial activity related to agricultural production. Also, a pledge of ownership interests as security for a loan is not a transfer of a controlling interest (but an execution or foreclosure on such interests would be). Additionally, there is an exclusion for the admission of new owners incident to the raising of additional capital if the effective management of the real property entity remains substantially unchanged and none of the new members is expected to participate in the day-to-day management of the real property entity.
Reporting Requirements: Unless one of the exclusions discussed above applies, the real property entity itself (and not the transferor or transferee of the controlling interest) has the burden of reporting each transfer of a controlling interest that is completed within a period of twelve months or less. The report must be filed with the Department of Assessments and Taxation ("SDAT") within thirty days after the completion of the transfer. Regardlessof whether the transfer qualifies for any exemption from the tax, the report must include the "consideration payable" for the transfer of the controlling interest and the value of the real property entity’s other assets. In addition, regardless of whether any taxes are due with the report, the real property entity must pay a $20 filing fee to SDAT.
The SDAT has not created a form or process to help regulate these transactions at this time. We will inform you when such becomes available.
THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.
- Bulletins Replaced:
- MD2008002 This Bulletin has been replaced by MD2008003.
- Related Bulletins:
- Underwriting Manual:
- Exceptions Manual: