- Florida Documentary Stamps: Ways to Avoid the Traps
Beware Real Estate Doc Stamp Tax Traps
By: Raymond J. Bowie, Esq.
The newlyweds had found one another later in life, after both were living comfortably in retirement. Each owned a nice home in an affluent neighborhood and a number of investment properties as well. In love, and also mindful of the benefits of spouses holding real estate jointly for both inheritance and asset protection purposes, they did as many newlyweds do: Each executed deeds conveying their individually owned properties into their names jointly, as husband and wife, as mutual gifts.
They thought they had exchanged wonderful Christmas gifts in this, their first Holiday Season together. At the county clerk's office, they had only been charged a nominal fee to record each of the gift deeds. Then, the day before Christmas, the "Grinch" arrived in their mail: Notices to each of them from the Florida Department of Revenue that in addition to the small recording fees they had paid, they owed a total of $17,500 to the state for "documentary stamp taxes." The Newlyweds' planned honeymoon cruise was… postponed.
Mr. and Mrs. Newlywed had fallen into one of Florida's many documentary stamp tax traps in attempting what appeared to be the simple transaction of jointly re-titling their individually held real estate. They did not know that in all transfers of real estate, even gifts between spouses, the state collects documentary stamp tax on the amount of any existing mortgages on the properties.
What happened was that Newlyweds had mortgages on each of the homes and investment properties they individually owned, altogether totaling $5,000,000 in outstanding mortgage debt. In order to jointly title all their properties, each deeded to the other a half interest in each of the properties they owned individually. And hence, Florida law imposed documentary stamp tax on half of the mortgage balance existing on each property. Assessed at a rate of 70 cents per every hundred dollars, the tax came to $17,500 based upon $2,500,000 – which was half of their combined mortgage balances.
Bizarre? Unfair? Incomprehensible? Perhaps so, but all are trademarks of Florida's documentary stamp tax system. Keep in mind: Florida's Constitution prohibits a state income tax on individuals. Bereft of that major source of revenue, Florida revenuers are constrained to wring taxes out of almost everything else – and real estate transactions offer a plump target. Logic must often give way to the need for tax revenue. In the above example, a gift of mortgaged property is deemed for transfer tax purposes not to be a true gift, but rather a transfer for taxable value or consideration: It's assumed that the giver (the "grantor") has received a valuable benefit in the recipient (the "grantee") assuming half the burden for the grantor's mortgage balance.
Since documentary stamp tax must be of concern in every conveyance of Florida real property, let's take a closer look at what it is and how it is assessed. The documentary stamp tax, sometimes called transfer tax, is assessed on the amount of the consideration paid for the transfer of any interest in real property located in Florida. The law defines all of the essential terms quite broadly.
Real property, for example, is defined to include things that are obvious like land, buildings, and condo and cooperative units, to things that may not be so obvious like timber and mineral interests, cemetery lots, leases, easements, foreclosure bids, beneficiary interests under land trusts, and purchaser rights under a installment sale/contract for deed.
A transfer of real property might seem, at first, easy to define. It obviously occurs when title is conveyed from party A to party B. But there are some conveyances that are statutory exceptions: transfers ordered by courts; eminent domain condemnations; transfer of a marital home from one spouse to the other in a divorce; deeds to property passing under a decedent's will; deeds from an agent to his principal; and deeds to a trust where the beneficiary of the trust is the same person as the grantor. Since these are statutory exceptions, they are not taxed even if the property involved is subject to a mortgage balance. Clear enough? Perhaps, until we look at some of the wrinkles.
Of all the requirements for assessment of the transfer tax, the term "consideration" may be the most difficult to comprehend, however. Consideration is the price or value paid for a real property transfer in money or other "reasonably determinable pecuniary value." Consideration thus includes any exchanges of real estate for other real property or personal property, or any other concrete benefit conferred upon the grantor by the grantee. Where there is no consideration, there is deemed to be a gift and hence no transfer tax imposed. Simple enough? It seems so, until we get to some of the convolutions.
The wrinkles and convolutions arising under these definitions are where misunderstandings, surprises and hardships occur regularly with the transfer tax.
One of these wrinkles is that which plagued the Newlyweds in our hypothetical case involving a gift deed to mortgaged property. Whenever the ownership of mortgaged property is changed by a gift deed, even if only to add an owner to the title, the transfer tax is assessed on a portion of the existing mortgage balance equal to the ownership share transferred to the new owner. For example, if the new owner is given a one-third interest in the property, tax is to be paid on an amount equal to one-third of the existing mortgage balance.
The same rule applies to transfers of property into a trust, often done for estate planning, probate avoidance, management convenience and privacy concerns. If the beneficiary of the trust is the same as the existing owner or grantor of the property, the transfer is exempt from the tax. This is true whether or not the property is mortgaged. However, if the property is mortgaged and the trust beneficiaries are persons other than or in addition to the grantor, transfer tax will be due on either all or part of the existing mortgage balance.
Another wrinkle in the transfer tax applies in the situation where, for consideration, an existing property owner is conveyed a larger share of the real property than he currently owns. Here, the transfer tax applies to any consideration paid to the extent that the owner's larger interest in the property now exceeds the size of his original interest. For instance, when the existing owner of a one-third interest in a property is now deeded a two-thirds interest, the transfer tax applies to 50% of any consideration paid since the owner's original interest was half the size of his larger new interest.
Yet another wrinkle in applying the transfer tax is seen when a property owner conveys his property to a corporation, partnership or limited liability company which he 100% owns. This may be done for business reasons or estate planning purposes as in the case of a family limited partnership. Unlike where the owner conveys his property to his own trust, any transfer to a business entity is deemed to be in exchange for a share of the business entity and taxed accordingly.
Unfortunately, the problem may become apparent in all these situations sometime after the deed or other instrument is recorded at the county courthouse where a tax form must be filed for every real property transfer. The Florida Department of Revenue audits these forms and if transfer tax was mistakenly not paid or miscalculated, the D.O.R. will dun the grantee.
Two precautions should be taken to help stave off the Grinch for stealing Christmas: First, all property transactions between parties involving gifts, trusts, fractional interests or business entities should be done in consultation with an experienced real estate attorney. Second, when originally taking title to real property, plan carefully how you wish to take title, especially when the property will be mortgaged. Otherwise, you may wind up paying Florida's documentary stamp tax more than once.