Navigating Transfer and Recordation Taxes in the DMV

Transfer and recordation taxes are an important and, in some cases, quite costly component of most real estate transactions in D.C., Maryland, and Virginia. The obligations and costs of these taxes differ in each jurisdiction, as do the strategies we utilize with our clients to avoid or minimize these taxes. The following summary addresses issues that are frequently asked about these taxes. Also, as noted below, the recordation tax in Montgomery County, Maryland, will increase significantly as of October 1, 2023, and the transfer tax in D.C. is scheduled to decrease significantly as of October 1, 2023.

District of Columbia – D.C. imposes a transfer tax on any deed that conveys title to real property in the District of Columbia and any lease that has a term of at least 30 years, including renewals (the D.C. Transfer Tax). Additionally, D.C. imposes a recordation tax on these instruments, as well as on mortgages and deeds of trust (the D.C. Recordation Tax). All deeds, memorandums of lease, deeds of trust and modifications and amendments thereto generally are accompanied by a special tax form, commonly referred to as the FP-7/C, when presented to the D.C. Recorder of Deeds for recordation. Mortgages and deeds of trust are subject only to the D.C. Recordation Tax and not the D.C. Transfer Tax. All deeds and other taxable instruments, unless specifically exempt by law, are subject to the D.C. Transfer Tax and the D.C. Recordation Tax, including deeds to lenders or purchasers in the context of a foreclosure.

The D.C. Transfer Tax and the D.C. Recordation Tax are also imposed when there is a “transfer of an economic interest” in an entity that during the 12-month period immediately preceding the transfer of the economic interest (i) derives more than 50% of its gross receipts from the ownership or disposition of real property in D.C.; or (ii) holds real property in D.C. that has a value comprising 80% or more of the value of its entire tangible asset holdings. A transfer of an economic interest occurs upon the conveyance, sale, or assignment, directly or indirectly, within any 12-month period, of more than 50% of the ownership of any corporation, partnership, association, trust, or other entity.

Recordation and Transfer Tax Decrease – Effective October 1, 2023, the D.C. Transfer Tax and D.C. Recordation Tax rates on commercial or mixed-use (Class 2) property deeds of $2 million or more will decrease as follows, lowering the total combined tax rate from 5.0% to 2.9%:

• The D.C. Transfer Tax rate will decrease from 2.5% to 1.45%; and
• The D.C. Recordation Tax rate will decrease from 2.5% to 1.45%.

Office of Tax and Revenue Notice – Refinancing Exemption – Also of note is a recent D.C. Office of Tax and Revenue (D.C. OTR) updated notice expanding its requirements for the refinancing exemption. Pursuant to that exemption, in certain circumstances when a loan secured by a mortgage is refinanced, the D.C. Recordation Tax is due only with respect to the increase in principal amount secured by the mortgage. However, that exemption has been narrowly construed by D.C. OTR and parties claiming the refinancing exemption must pay very close attention to the rules.

Under D.C. OTR’s updated notice, to qualify for the refinancing exemption, a loan that refinances an existing loan must be made to the same obligor as the original loan. Additionally, the refinancing exemption applies if the new real property that secures the loan is the same real property that secures the loan being paid off. The refinancing exemption still applies if additional real property is added as security to the new loan, but no property securing the loan being paid off can be released. Finally, the notice emphasizes that the new loan, at minimum, must, pay off the existing loan. The new loan amount is allowed to exceed the previous loan but the increased amount (i.e., the amount by which the new loan exceeds the then principal balance of the existing loan at the time of the refinancing) will be subject to the D.C. Recordation Tax.

D.C. Purchase Money Exemption – Under D.C. law, a “purchase money” mortgage or deed of trust is exempt from the D.C. Recordation Tax to the extent that it secures the loan used to acquire property, as long as it is given as part of the same transaction as the conveyance. The exemption is limited to the amount of the taxable consideration paid for the conveyance, and D.C. OTR believes that the exemption applies only when the deed and mortgage securing the purchase money loan are recorded simultaneously with each other. D.C. OTR officials in the Recorder of Deeds office are notoriously exacting in enforcing this exemption, demanding strict adherence to each requirement in order to benefit from this exemption.

Maryland

Maryland Transfer and Recordation Tax: Maryland imposes transfer and recordation taxes on recorded instruments, made up of three components: (a) a MD State Transfer Tax at a fixed rate of 0.5% state-wide; (b) a MD County Transfer Tax at a variable rate set by each county; and (c) a MD Recordation Tax at a variable rate set by each county. Recorded deeds and other conveyances are subject to all three components of the tax, calculated on the “consideration paid” for the conveyance. Security instruments are subject only to the MD Recordation Tax in most counties (with the exception of Prince George’s County, which also imposes its MD County Transfer Tax on security instruments), calculated on the “amount secured”. There is significant variation among jurisdictions in tax rates and the application of certain exemptions.

Recent and Upcoming Changes in Maryland: Several recent legislative developments will affect MD Transfer and Recordation Taxes in Maryland:

1. Montgomery County – Increase in MD Recordation Tax Rates. Effective as of October 1, 2023, Montgomery County will significantly increase its MD Recordation Tax rates. Currently, the County has two marginal MD Recordation Tax brackets: 0.89% for amounts up to $500,000, and 1.35% for amounts over $500,000. Under Montgomery County Council Bill 17-23, these existing rates will continue to apply to amounts up to $600,000, but three new “premium” marginal brackets will be added for amounts over $600,000, as follows:

   Consideration Paid or Amount Secured	Total Marginal MD Recordation Tax Rate
   Up to $500,000	0.89% (no change)
   $500,000 to $600,000	1.35% (no change)
   $600,000.01 to $750,000	2.04%
   $750,000.01 to $1,000,000	2.156%
   Over $1,000,000	2.27%

   
   Additional details on the legislation are available on the County’s website here. Note that MD Recordation Tax rates are set and calculated per $500 of consideration paid or debt secured, but are presented here as percentage rates for ease of reference.

   This increase in MD Recordation Tax rates will significantly increase the cost of large transactions in Montgomery County, with the total combined MD Transfer and Recordation Tax rate in the top bracket increasing from 2.85% to 3.77%. This change only applies in Montgomery County, and does not affect tax rates in other Maryland counties.

2. Statewide – Increased Threshold for Indemnity Deeds of Trust. Effective as of July 1, 2024, the threshold for MD Recordation Tax deferral on indemnity deeds of trust will increase from $3,000,000 to $12,500,000. This increase applies state-wide.

   An indemnity deed of trust (IDOT) is a financing structure that was widely used for decades in Maryland to defer MD Recordation Tax on commercial real estate financing transactions. With an IDOT, the deed of trust is granted by a guarantor of the loan, not directly by the borrower. Under Maryland case law, the guarantor’s liability was considered to be a contingent liability until enforced. Prior to July 2012, Maryland did not require payment of MD Recordation Tax on an IDOT at the time of recording; instead, collection of MD Recordation Tax, if ever, was deferred until a default on the loan by the borrower, at which time the guarantor’s liability would be non-contingent. The availability of this deferral was limited by the Maryland General Assembly in 2012, and the deferral is currently limited to IDOTs under $3,000,000.

   The Maryland General Assembly increased the MD Recordation Tax deferral threshold for IDOTs from $3,000,000 to $12,500,000 effective as of July 1, 2024. This increase will make the MD Recordation Tax deferral for IDOTs available to a broader range of commercial real estate financing transactions, and may revive the use of the IDOT structure as a means to reduce MD Recordation Tax liability.

   For more information and details on the application of the MD Recordation Tax deferral for IDOTs, please see our prior alert on this topic.

3. Anne Arundel County – Increase in MD County Transfer Tax. Effective July 1, 2023, Anne Arundel County created an additional MD County Transfer Tax bracket that applies to all transfers where the consideration is $1,000,000 or more. Prior to this change, the MD County Transfer Tax was 1% on all transactions. As a result of the change, the MD County Transfer Tax is 1% on all transactions where the consideration is less than $1,000,000, and 1.5% where the consideration is equal to or greater than $1,000,000. Note that this is not a marginal tax rate, and the higher rate would apply to the entire amount of the consideration if it is equal to or greater than $1,000,000. The MD County Transfer Tax is in addition to the MD State Transfer Tax of 0.5%, and the MD Recordation Tax of 1.4%. This change only applies in Anne Arundel County, and does not affect tax rates in other Maryland counties.

Common Maryland Exemptions. Several statutory exemptions to MD Transfer and Recordation Taxes are available based on the circumstances of the transaction and the parties involved. The following exemptions are commonly applicable in financing transactions:

1. Purchase Money Exemption. Similar to D.C., a “purchase money” mortgage or deed of trust is exempt from MD Recordation Tax to the extent that it secures a loan used to acquire property, as long as it is given as part of the same transaction as the conveyance and is executed and recorded no later than 30 days after the execution and recordation of the taxable instrument of writing transferring the property. The exemption is limited to the amount of the taxable consideration paid for the conveyance, so financing that exceeds the purchase price is not fully exempt.

2. Refinancing Exemption. Maryland has a broad refinancing exemption applicable to both residential and commercial transactions. The exemption applies to the extent that a new deed of trust or mortgage secures a refinance loan in an amount not greater than the unpaid principal amount secured by an existing mortgage, indemnity mortgage, or deed of trust at the time of refinancing, and is given by the “original mortgagor”, which is defined to include both the original grantor and certain transferees. Note that the exemption applies only to the extent of the outstanding principal balance at the time of the refinancing, rather than the original principal balance. Claiming the exemption requires a certification of the outstanding principal balance, and some counties have their own required form of certification that must be used.

   In some circumstances, the purchase money and refinancing exemptions can be combined. If a property is being purchased for cash with the expectation that a loan will be put in place after the closing, the buyer can record a purchase money deed of trust to an affiliated entity securing the full amount of the purchase price at the time of the initial closing. The original purchase money deed of trust can later be refinanced and receive the benefit of the refinancing exemption.

3. Entity Transfers. Maryland’s “controlling interest transfer tax” applies to transfers of a “controlling interest” in a “real property entity” (the MD CITT). A controlling interest is generally more than 80% of the interests in a real property entity. A real property entity is an entity that holds Maryland real property that constitutes at least 80% of the value of its assets, and has an aggregate value of at least $1 million. The applicable tax is equal to the MD Transfer and Recordation Taxes that would be paid on a transfer of the underlying property by deed. A transfer of interests in an entity that is under the thresholds for a “controlling interest” in a “real property entity” is not be subject to the MD CITT.

4. Leasehold Interests. Recorded leases and memorandums of lease also may be subject to MD Transfer and Recordation Taxes. Leases for more than seven years must be recorded to take effect and pass a legal estate to the tenant; however, Maryland law also provides broad protections for the enforceability of unrecorded leases, and as a result many parties elect not to record their leases. A lease with an initial term that does not exceed seven years, and renewal terms that do not exceed seven years and are optional to one of the parties, is not required to be recorded, and is not taxable if it is recorded. Parties who want to record their lease without MD Transfer and Recordation Taxes may elect to structure the lease term to fit within this exemption. In Montgomery County, both the initial grant and any subsequent transfer of leasehold interests are exempt from MD County Transfer Tax, but are still subject to MD State Transfer Tax and MD Recordation Tax.

5. Allocation of Consideration. MD Transfer and Recordation Taxes on a conveyance apply only to the consideration paid for interests in real property. In circumstances where a single purchase price is being paid to acquire real property, personal property, and intangibles, only the portion allocable to the real property is required to be recited in the deed and made subject to MD Transfer and Recordation Taxes. In the recent case of Shelter Senior Living IV, LLC v. Baltimore County Maryland, et al., 251 Md. App. 129 (Md. Ct. Spec. App. 2021), the Maryland Court of Special Appeals confirmed that MD Transfer and Recordation Taxes do not apply to personal property, including intangible business assets such as goodwill and business licenses that are tied to a business operating at the property. Note that some personal property that is not subject to MD Transfer and Recordation Taxes may be subject to Maryland sales tax, at a rate higher than the combined MD Transfer and Recordation Tax rates. Parties to transactions conveying both real and personal property should be careful to allocate the consideration accurately to avoid overpaying MD Transfer and Recordation Taxes.

Virginia

Virginia Transfer and Recordation Tax

On any deed that conveys title to real property within the Commonwealth of Virginia, including leases that have a term of at least seven years (including renewals), Virginia imposes several types of transfer taxes and fees: (i) a grantor’s tax and a grantee’s tax at the state level (collectively, VA State Transfer Taxes); (ii) if enacted by a Virginia locality, pursuant to Dillion’s Rule¹, a grantor’s tax and a grantee’s tax at the county level (collectively, VA Local Transfer Taxes); and (iii) in certain regions throughout the Commonwealth, including Northern Virginia, regional congestion relief fees (collectively, Regional Congestion Relief Fees and, together with VA State Transfer Taxes and VA Local Transfer Taxes, collectively, VA Transfer Taxes). Additionally, as in D.C. and Maryland, Virginia imposes a recordation tax only on mortgages or deeds of trust (VA State Recordation Tax) and, pursuant to Dillon’s Rule, permits a locality to collect a recordation tax in the amount of 1/3 of the VA State Recordation Tax (VA Local Recordation Tax and, together with VA State Recordation Tax, collectively, VA Recordation Taxes). Unlike those jurisdictions, however, Virginia does not require the simultaneous filing of special tax forms or other affidavits to evidence the entitlement of a deed (or any other instrument admitted to record) to an exemption. Mortgages and deeds of trust are subject only to VA Recordation Taxes and not to VA Transfer Taxes. All deeds and other taxable instruments, unless specifically exempt by ordinance, are subject to the VA Transfer Taxes (as noted, among other transportation-related fees insofar as Northern Virginia transactions are concerned), including deeds to both lenders and purchasers in the context of a foreclosure.

Virginia Transfer and Recordation Tax Strategies

VA Transfer Taxes and VA Recordation Taxes are much lower than in D.C. or Maryland. As shown in the table below, even if a transaction occurs in a local jurisdiction that is required to collect Regional Congestion Relief Fees and has elected to collect the VA Local Recordation Tax along with the VA State Recordation Tax, and there is financing on 100% of the purchase price, the total effective tax rate of a transaction in Virginia is currently less than 1% of the total consideration. Relatively low rates notwithstanding, Virginia has a number of VA Transfer Tax and VA Recordation Tax strategies and exemptions that can help further lessen the amount or applicability of these types of taxes:

1. When it comes to VA Transfer Taxes, the first place to start is in the purchase and sale agreement. By removing personalty, including general intangibles, from the price of the real property and fixtures entirely via the allocation of the purchase price, the parties can lower the consideration for the transaction that must be reported on all arms-length deeds of conveyance in Virginia.

2. Virginia does not tax transfers of controlling interest in entities.

3. Virginia does not tax deeds of conveyance to or from a partnership or limited liability company when the grantors are entitled to receive not less than 50% of the profits and surplus of such partnership or limited liability company, provided that the transfer to a limited liability company is not a precursor to a transfer of control of the assets of the company to avoid recordation taxes. This is effective for intra-company or “affiliate” transfers.

4. Generally, when a mortgage or deed of trust is refinanced, VA Recordation Taxes are due only with respect to the increase in the principal amount of the note secured by the instrument. To effectuate this, the most commonly used structure is assigning the existing lender’s obligations to the new lender and then amending and restating the indebtedness, in which special legends are used on the face of the instrument and in recitals to evidence the fact that recordation and transfer taxes on all or portion of the debt secured by the amended and restated deed of trust have been paid in full in connection with the underlying financing.

Comparison of Taxes Among DMV Jurisdictions

Taking into account the changes that take effect on October 1, 2023, the following is a comparison of the various transfer tax and recordation tax rates in D.C., the Maryland suburbs, and Northern Virginia for a conveyance by deed with $10,000,000 in consideration paid, without any applicable exemptions and without financing:

*Amount is inclusive of the applicable Regional Congestion Relief Fees, as well as the portion of VA Transfer Taxes for a conveyance without financing assessed at the locality level for a transaction in Northern Virginia.

How We Can Help

Our real estate lawyers, in conjunction with our tax lawyers, are well-versed in their respective jurisdiction’s transfer and recordation tax laws. Please feel free to reach out to a Ballard Spahr attorney to strategically structure your next real estate transaction.

1: Under Dillon’s Rule, a locality may not enact legislation unless expressly given authorization to do so by the state legislature, or unless necessarily and fairly implied by the grant of power by the state. As a result, virtually all significant legislative enactments in Virginia are passed at the state level, and therefore have statewide application. This extends to transfer and recordation taxes, in which all of the taxes collected by a locality are a part of state-wide taxation scheme, with one exception.

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