"SHORT SALE" CONTROVERSY RESOLVED [FLORIDA]

In my posting of September 6, 2008, I discussed the controversy that had arisen over real property "short sales" in Florida. If you recall, a "short sale" occurs when a buyer purchases encumbered real property for less than the existing debt on the property, and the existing lender allows the buyer to obtain the property without a mortgage lien relating to the portion of the debt that the buyer is not taking over. Problems arose when the Florida Department of Revenue indicated that documentary stamp taxes on the real property deed would be based on the amount of the existing mortgage debt, not the lesser purchase price paid by the buyer.

The Department of Revenue has now resolved this issue in a manner favorable to taxpayers. At least in situations involving unrelated buyers and sellers, it has indicated in a recently issued Technical Assistance Advisement that the documentary stamp taxes will be calculated on the lower purchase price paid by the buyer, without regard to the portion of the mortgage debt that is not taken over by the buyer. It has based its position on the interpretation that consideration passing between the buyer and the seller is equal only to what the buyer is paying. The fact that there is a simultaneous reduction in the mortgage debt by the lender should not affect the consideration amount between the buyer and seller.

Given that Florida is one of the states suffering the most from real estate value declines, and the continued need for short sales to help clear the market of properties which are encumbered in excess of their current values, it is noteworthy that the Department of Revenue adopted a position that is both legally sound and will help provide relief to the current real estate crisis.

Technical Assistance Advisement 08B4-006, September 23, 2008

DOC STAMP "SHORT SALE" RULING EXPECTED SOON [FLORIDA]

Florida imposes documentary stamp taxes on the transfer of real property, based on the amount paid for the property. Amounts paid for the property include mortgage indebtedness that encumbers the property.

The declines in real property values has given rise to a substantial increase in real property "short sales." These sales are purchases by third parties of distressed real property from the owners at a sales price less than the current mortgage indebtedness, with the lender typically forgiving the unpaid mortgage amount.

The question arises whether documentary stamp taxes should be computed on the full mortgage amount (before the forgiveness), or on the lower purchase price paid by the buyer. By analogizing to existing rules that impose documentary stamp taxes on the full indebtedness amount when a mortgage holder transfers encumbered real property back to the lender as a deed in lieu of foreclosure, the Florida Department of Revenue has informally advised that it believes documentary stamp taxes in a short sell should likewise be based on the full amount of the mortgage debt.

There are practical difficulties with using the full amount of the mortgage debt. For example, buyers may not be aware of the full amount of the debt when they buy, even though they are responsible for the documentary stamp taxes (along with the seller). Further, since sellers are usually responsible by contract for payment, imposing higher taxes only increases the financial burden and distress of the home seller.

It is expected that the Department of Revenue will be issuing guidance to taxpayers within the next two weeks. If the Department indicates that the higher tax amounts are due, there is a possibility that the Legislature could try to reverse it through legislation, at least in regard to situations involving insolvent sellers.

DOCUMENTARY STAMP TAX RETURNS FOR REAL ESTATE TRANSFERS [FLORIDA]

Florida imposes documentary stamp taxes on transfers of real property. The amount of the stamp taxes is based on the consideration paid for the real property.

So as to allow computation of the taxes, taxpayers previously used Form DR-219 to report the amount of consideration paid for the real property. In a curious move, Fla.Stats. §201.022 has been repealed, effective June 1, 2008. This is the provision that required the filing of the Form DR-219, so apparently that Form is no longer needed. This provision does NOT repeal the documentary stamp tax itself.

How the local county recorder's offices will be able to compute the documentary stamp tax due is anyone's guess. Presumably, each county will likely require their own form or method of reporting.

For a listing of current and historical documentary stamp taxes, see the Tax Tables & Info area at www.floridatax.com.