Change in Amount of IDOT that Triggers Tax and Exemption from Recordation Tax for Refinance of IDOTs and More

Edward J. Levin of Gordon Feinblatt contributed the following summary of SB436/HB1209 passed by the General Assembly during its 2013 session (effective July 1, 2013):

This law makes several important changes to the way mortgages and deeds of trust and indemnity mortgages and deeds of trust (IDOTs) are treated for Maryland recordation tax purposes.  IDOTs secure guaranties of loans.

Currently, IDOTs securing guaranties of loans of up to $1 million are exempt from Maryland recordation tax.  This law increases the amount for the exemption up to $3 million.  All loans in a series that are part of the same transaction must be aggregated to determine if the $3 million threshold is reached.

In addition, this law changes the definition of “supplemental instrument of writing” in the recordation tax law to specifically provide that IDOTs are instruments that may be amended by a “supplemental instrument,” even if recordation tax was not paid when the IDOT was recorded, and then provides that the recordation tax on a supplemental instrument will apply to the difference between the new loan amount and the outstanding principal balance secured by the instrument being modified “immediately prior to the time the supplemental instrument of writing is entered into.”  Currently, supplemental instruments of writing are only taxable on the amount of the increase in the debt secured by the supplemental instrument.  The debt secured is the amount stated in the security instrument as the maximum principal amount that may be secured.

The effect of these changes is that IDOTs and other mortgages and deeds of trust will be treated in the same way for recordation tax purposes upon refinancings.  IDOTs may be supplemented and increased, and the recordation tax will be based on the amount of the increase over the principal amount of the debt outstanding just before the supplemental instrument is signed.

Example:  The original loan was $100 and it was paid down to $90, and then a supplemental instrument increases the loan to $110.  Under current law (effective until June 30, 2013), the recordation tax is based on $10 (which is $110 – $100) (although a number of counties base the recordation on the full amount of $110 if IDOTs are involved and some counties are basing the tax on $20 now.)  After July 1, the recordation tax will be based on $20 ($110 – $90) for IDOTs or regular mortgages or deeds of trust. 

The law also permits recordation tax on an IDOT covering property within and without Maryland to be computed by comparing the value of the Maryland property to the value of all of the property that is security for the loan (as may be done with other mortgages or deeds of trust), or the tax may be calculated on the amount of debt stated to be secured by the IDOT.

Finally, the law provides that a mortgage or deed of trust is not subject to recordation tax to the extent that it secures the refinancing of an amount not greater than the unpaid principal amount secured by an existing mortgage, deed of trust, or IDOT at the time of refinancing if the refinancing is by the original mortgagor.  Currently, this exemption is available only on real property that is the principal residence of an individual borrower.  This will obviate the need for lenders to sell their debt in order to reduce recordation taxes at the time of refinancings.

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