• Recordation Tax Exemption on Indemnity Deeds of Trust Preserved (Maryland Legislation Update)
  • May 3, 2012 | Authors: Margaret "Ann" Brown; R. Craig Fitzenreiter; Kimberly Hargrove; M. Kevin McCusty; Jackson W. Prentice
  • Law Firms: Troutman Sanders LLP - McLean Office ; Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - McLean Office
  • The most recent attempt to impose recordation tax on indemnity deeds of trust (IDOTs) failed on the last day of the most recent session of the Maryland General Assembly. Senate Bill 152, the Budget Reconciliation and Financing Act of 2012, would have imposed recordation tax on IDOTs securing obligations of more than $1,000,000. A special session to address the issues contained in this bill is possible, but, for the moment at least, parties to real estate finance transactions in Maryland may continue to use IDOTs to avoid the payment of recordation tax.

    The law and the interpretations of law that presently permit avoidance of Maryland recordation tax by using an IDOT are often casually described as creating an exemption from recordation tax, but they actually provide for deferral of the tax unless and until a default occurs. The parties to a mortgage loan transaction secured by real property in Maryland have the option either to pay recordation tax on the entire secured amount at the time the security instrument is recorded or to pay recordation tax as the secured debt is incurred.

    In accordance with the Maryland attorney general’s opinions interpreting the recordation tax law, a guarantor does not incur the guaranteed debt at the time the guaranty is given if the terms of the guarantee provide that a condition (usually a default under the guaranty or the underlying loan documents) must occur before the guarantor becomes liable for payment. So, if the grantor of the security instrument (the IDOT) is the guarantor of the loan rather than the borrower and the IDOT secures the guarantor’s obligations under its guaranty rather than the borrower’s liability under the promissory note, recordation tax can be deferred until the guarantor incurs the guaranteed debt.

    If the guaranty provides that the guarantor’s payment obligation is subject to the occurrence of a default, then, for purpose of recordation tax, no part of the guaranteed debt is incurred by the guarantor unless and until such a default occurs. Assuming no default then exists, recordation tax is not due at the time the IDOT is recorded.