Lakeside Title

DID YOU KNOW that a significant change in Maryland’s tax law impacting real estate transactions will take effect on July 1, 2008. In Maryland it has been possible to transfer real property owned by an entity, such as a limited liability company, corporation, or partnership, without paying transfer or recordation fees, simply by transferringthe entity from one owner to another. For example, if an LLC owns real estate as its sole asset, the LLC members sell their interest to buyers who then become the members. This requires only a document called Assignment of Membership Interest, which is signed by all parties and retained with the LLC operating agreement. No State filing is required, although most times the name and address of the resident agent will have to be changed. And so the real property owned by the LLC is effectively transferred from seller to buyer; no deed is recorded and no transfer and recordation taxes are paid. This same technique has been used for partnerships, bya transfer of the partnership interests, and for corporations by a transfer of the stock.

Beginning July 1, 2008 transfer and recordation taxes will be collected for transfers of a Controlling Interest in a real property entity, just as if a deed is recorded. A real property entity is defined as any type of entity or trust that directly or indirectly owns real property in the state if that real property(a) constitutes at least 80% of its assets, and (b) has an aggregate value of at least $1,000,000.00. A Controlling Interest is defined as more that 80% of total value of all classes of stock in a corporation, of the beneficial interest in a trust, or of the total interest in any other entity.

The new law does not include transfers of interests in farm property. It does not include the admission of new owners, partners shareholders, or members incident to the raising of additional capital so long as the effective management of the real property entity is not substantially changed, and none of the new members is expected to participate in the day-to-day management of the entity.

The entity will be responsible for paying the tax; regulations, reporting, and payment methods will be developed by SDAT.

DID YOU KNOW that legislation enacted by the 2007 session of the Maryland General Assembly will require homeowners to submit a one-time application in order to initiate or continue their eligibility for the Homestead Tax Credit? The homestead credit limits the amount of the assessment increase on which a homeowner will pay property taxes in that tax year on the one property actually used as the homeowner’s principal residence, and it had been the only tax credit given without a written application. The legislation was enacted because some property owners are receiving the credit for vacation and investment homes, in addition to their principal residence.

Applications will be mailed by SDAT with the Assessment Notices mailed to homeowners in the normal course, over the next three (3) years. New purchasers(after December 31, 2007) will receive an application after the transfer is recorded and must file it within 180 days of the transfer date. Applications may be filed by mail or electronically on SDAT’s website at: https://sdathtc.resiusa.org/homestead/.

If a dwelling is transferred whose property tax contained a homestead credit, that credit will not be given to the new owner for the tax year following the transfer, whether they file an application or not. A homeowner must actually reside in the dwelling by July 1 of the taxable year for which the tax credit is to be allowed.

This will impact the purchase transaction. When a title company provides tax information to a mortgage lender, it should no longer base that information on last year’s property taxes; it will base it on the taxes less the homestead credit. The lender will compute the monthly tax escrow payment on that increased amount, therefore, the buyer’s monthly PITI payment will exceed an amount based on the seller’s annual taxes. If the realtor or mortgage loan officer predicts a monthly payment based on the seller’s annual taxes, and the seller has been receiving a substantial homestead credit, the monthly payment amount presented at the settlement table could be several hundred dollars higher than the predicted amount, or the amount shown on the good faith estimate. This could cause some discomfort.

The amount of the homestead tax credit may be found on the web site for the county in which the property is located. It is shown as a line item on the tax bill. Settlement will be a much more pleasant process if the homeowner receives an accurate payment prediction in advance.