With property values slowly increasing and borrowers beginning to see the light at the end of a long recession, the demand for renewal loans is slowly building. To that end, let’s briefly review a few of the key rules concerning documentary stamp taxes as they apply to renewal loans.
Generally, in Florida, a written promise to pay a sum certain, executed or delivered in the state, is subject to documentary stamp tax at the rate of 35 cents per $100 of the obligation. Renewal loans, though, are considered to be exempt from tax provided certain rules are followed. First, the renewal must be for an amount not exceeding the exact principal balance then outstanding. Renew the loan for more than that and the entire obligation may be subject to documentary stamp tax. One exception is for revolving lines of credit which may be renewed, tax exempt, for their face amount regardless of the outstanding balance on the line at the time of renewal. If you have an obligation that the borrower wants to increase, you may do so and pay documentary stamp tax only on the incremental amount (the “new money”) provided that tax was originally paid on the obligation and the renewal note bears a legend explaining the transaction and describing the advance to the outstanding balance.
A second rule for tax exemption is that there must be no new obligors added to the renewal note. You can always have fewer signors on the note at renewal; you simply cannot add a party to the note that was not originally a signor without rendering the entire obligation subject to the tax. Many lenders circumvent this rule by adding guarantors which does not trigger any documentary stamp tax.
Finally, remember that a promissory note that was originally executed and delivered outside of Florida (presumably to avoid documentary stamp tax) must be renewed in similar fashion. If the renewal note is either signed or delivered in the state of Florida, the entire obligation will be taxed.
While there are other tax related issues that arise in the context of renewal loans, I find that the three discussed here account for the majority of questions I see in my practice.