Maryland Tax Court Decision on Deferred IDOT Recordation Tax Should Create More Predictability in Foreclosures.
In past Maryland real estate financing transactions, borrowers have commonly set up a related entity to own real estate, and to pledge that real estate under an indemnity deed of trust (“IDOT”) as security in exchange for the entity’s guaranty. This structure was beneficial to borrowers because a guarantor’s liability is not deemed actually incurred until the borrower defaults under the primary debt. In other words, the debt secured by the IDOT was not incurred at the time the IDOT was recorded. Accordingly, until July 1, 2012 (as of July 1, 2012 recordation taxes must be paid on IDOTs securing loans of $1 Million or more) Maryland counties could not collect recordation tax on IDOTs unless and until the borrower defaulted.
In the past, as long as the underlying debt was timely paid, recordation taxes would never be collected. However, the past few years have seen a significant increase in Maryland foreclosures. Several Maryland counties began asserting that, when a secured party foreclosed on an IDOT, the county could refuse to record the resulting trustee’s deed unless and until the deferred recordation tax on the underlying IDOT and the recordation and transfer taxes on the trustee’s deed were paid. Although these counties have been making demands upon the guarantor in addition to the secured party, the burden falls squarely upon the secured party, who is prevented from conveying its collateral to a third party or taking title to the collateral as a credit bidder until the taxes are paid. In many instances, those taxes are significant.
In a matter that arose on appeal from a request for refund from Howard County Department of Finance, the Maryland Tax Court ruled that only the guarantor is obligated to pay the deferred recordation tax in IDOTS and that, accordingly, the county may not refuse to record a trustee’s deed post-foreclosure, so long as the purchaser pays the applicable taxes on that deed.
If this decision stands, it will lend greater predictability to the costs of foreclosures on IDOTs, which, up to now, have necessarily included an analysis of the potential deferred recordation taxes on the IDOT. Howard County has until September 27, 2012 to file a petition for judicial review to a Maryland Circuit Court. If the decision is not appealed, it may lead secured parties who have recently foreclosed and paid the IDOT recordation tax to seek refunds from the applicable county. The Tax Court decision required that Howard County repay the deferred recordation tax with interest at 6% per annum from the date the taxes were paid.
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Submitted By: Patricia B. Jefferson