- Property Owners Face Higher Taxes in Montgomery County
- June 20, 2016 | Author: Cindi E. Cohen
- Law Firm: Lerch, Early & Brewer, Chartered - Bethesda Office
- The Montgomery County Council and the Maryland State Legislature both passed legislation that will result in higher taxes associated with the ownership and transfer of real property in Montgomery County.
The Montgomery County Council voted to raise the average residential property tax bill by 8.7 percent - the largest increase in seven years. The council set the property tax rate at $1.02 per $100 of assessed value, 3.9 cents above last year’s rate. About half of the additional funds resulting from the tax increase will go toward Montgomery County public schools.
In addition, the county council also voted to increase the recordation tax rate charged in connection with the recordation of a deed to or mortgage on real property in the county. The legislation increases the rate of tax from $3.45 per $500 to $4.45 per $500 of consideration for the first $500,000 of consideration, or 0.89%, and from $5.00 per $500 to $6.75 per $500 of the consideration above $500,000, or 13.5%.
Certain council members expressed support for exploring the possibility, at a later date, of an even higher tax rate for consideration over $1,000,000. A portion of the additional revenue generated will go to the county’s general fund and a portion will be reserved for and allocated to the cost of capital improvements to schools.
For purposes of calculating the recordation taxes, the consideration is generally the purchase price in the case of a deed and the loan amount in the case of a deed of trust. For a deed of trust that refinances an existing loan, the tax is only paid on the difference between the amount of the new loan and the balance of the loan which is being repaid. However, the balance of the loan being repaid is deemed to be included when determining whether the lower rate assessed against consideration under $500,000 applies.
Agricultural Transfer Tax Calculation Adjusted
The State of Maryland also passed legislation affecting how the maximum amount of transfer tax payable in connection with the transfer of agriculturally assessed property will be calculated.
When property in Montgomery County that has been agriculturally assessed is being transferred, and the transferee does not intend to continue to farm the property, Montgomery County assesses a 6 percent transfer tax. This excludes the value of the improvements, which are taxed at the standard 1 percent rate. Also, the 6 percent rate is reduced for each year that a property is not agriculturally assessed prior to the transfer.
In addition to the county’s tax, the State of Maryland also imposes an agricultural transfer tax on the transfer of property. The state’s tax rate varies from 5 percent down to 3 percent, depending on the acreage of the parcel being conveyed. In addition to the state’s base agricultural tax rate, a surcharge of an additional 25 percent of the tax is assessed.
In order to limit the total transfer tax that may be assessed in a single transaction, the Maryland Code provides that if a transaction is subject to the state agricultural transfer tax, then the total rate of tax, including both the state and county taxes, cannot exceed 6 percent (5 percent plus the normal rate applied to residential transfers of 1 percent). Prior to the recent legislation, based on a recent Court of Appeals of Maryland, Montgomery Co. v Phillips, the state’s base rate and surcharge were both included before determining the maximum additional tax, if any, that the county could charge.
The new legislation overrides the Phillips decision and prohibits the surcharge from being factored into the maximum allowable tax rate of 6 percent. For purposes of calculating the maximum transfer tax allowable, the total agricultural transfer tax assessed by the state is now the base rate of 3 to 5 percent. Montgomery County can then charge its own transfer tax, up to the maximum 6 percent rate. The state’s surcharge will then be due from the parties in addition to that 6 percent.
With more money owed, the new legislation makes it even more important to pay attention to who pays the transfer taxes. The Maryland Code states that the costs of all transfer and recordation taxes shall be shared equally between the buyer and the seller, unless the contract stipulates differently. However, in connection with agriculturally assessed property, the seller must advise the purchaser if the state agricultural transfer tax may be applicable, and if this disclosure is not made, the seller will be liable for the buyer’s share of this tax. As long as the seller complies with this disclosure requirement, the statutory presumption of who will pay transfer and recordation taxes may be overridden if the contract of sale expressly provides otherwise.
Due to issues such as potential new legislation and highly nuanced rules, is always wise to consult with a professional regarding all aspects of transfer and recordation taxes that will be levied in connection with any transaction.