Commercial Borrowers Should be Familiar with the Refinance Exemption in Order to Avoid Paying More Taxes than Necessary

by Miles & Stockbridge P.C.

It is pretty well known that Maryland imposes taxes upon the sale/purchase of real property. The State requires both a recordation tax and a transfer tax to be paid whenever an ownership interest in property is transferred. Additionally, counties have their own set of transfer taxes that must be paid.

In 2013, a Refinance Exemption came into effect. Although the Refinance Exemption has been in effect for several years, there is still some confusion surrounding when the exemption applies. Such confusion has been evidenced by numerous questions pertaining to the 2013 changes to the refinance statute in Maryland.  

Prior to 2013, the refinance exemption was only available to residential borrowers and applied only to the refinance of a primary residence. In order for commercial borrowers to avoid paying substantial recordation taxes, they would have to arrange for note sales and assignments of loan documents in order to get credit toward recordation tax liability. Per Section 12-108(g) of the Tax-Property Article of the Maryland Code, the changes to the statute allow for the refinance exemption to apply when the following conditions are satisfied:

  1. the mortgagor must be the original mortgagor, or the person or entity which assumed the existing debt from the original mortgagor;
  2. there is an existing unpaid principal balance on the loan secured by the existing deed of trust; and
  3. the amount secured by the refinance deed of trust is not greater than the unpaid principal balance on the loan secured by the existing deed of trust.

The Refinance Exemption allows that, in the event the amount secured by a refinance deed of trust is greater than the unpaid principal balance of the loan secured by the existing deed of trust, State Recordation Tax is calculated on the amount of the increase, as opposed to on the entire new principal amount. If, however, the amount secured by a refinance deed of trust is less than the unpaid principal balance, then no State Recordation Tax will be imposed upon the recording of the refinance deed of trust.

It is worth noting, that State Transfer Taxes are not imposed on refinance deeds of trusts, since under State Law, a refinance is not considered a transfer of interest in real property. In most cases, the same could be said for County Transfer Taxes.  Typically, this same logic is applied with County Transfer Taxes. However, some counties have implemented their own interpretation of “transfer,” and require the collection of county transfer taxes on refinance deeds of trusts. For example, in Prince George’s County, the county will calculate transfer taxes based on the difference between the amount secured by the refinance affidavit and the amount of the unpaid balance of the loan secured by the existing deed of trust (identical to how State Recordation Taxes are calculated on refinance deeds of trusts).  

In addition to nuances regarding transfer taxes, some counties, including Prince George’s County, will require their own refinance affidavits; as opposed to the standard state refinance affidavit.  If this affidavit does not accompany the refinance deed of trust,  or if the proper recordation and transfer taxes aren’t paid in connection with the recording of the instrument, then the document will likely be rejected, meaning that it will not be recorded at that time.  Although this is an issue with a very attainable solution, security instruments should be recorded promptly in order to avoid any issues with priority later in time. Therefore, it is imperative that the proper amount of taxes, as well as the necessary forms, accompany security instruments to the clerk’s office. In order to avoid delays in the recording of security instruments, it is worth a call to the clerk to see exactly what is required in order to meet the criteria of the refinance exemption. 

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Accessing this blog and reading its content does not create an attorney-client relationship with the author or with Miles & Stockbridge. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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