Maryland Legislature Votes to Close Loophole in Property Transfer/Recordation Tax

The Tax Reform Act of 2007, which was passed by the Maryland legislature early in the morning of November 19th and signed into law by Gov. Martin O'Malley the same day, ushers in a host of new and increased taxes in Maryland. The headlines have been full of references to slot machines and higher sales taxes, but one obscure yet significant provision has remained hidden in the shadows outside the otherwise intense press coverage. The Act snuffs out a loophole widely used by real estate investors to circumvent Maryland's taxes on the transfer of real property and the recordation of property deeds.

While transfers of Maryland real property from one person or entity to another result in substantial transfer and recordation taxes (1.2% to 3%, depending on the county), real estate investors have avoided such taxes by transferring ownership in the entity which owns the property, such that the property technically continues to be owned by the same company, although indirectly controlled under new ownership. The new law, which takes effect on June 30, 2008, will require taxes on transfers of a "controlling interest" (i.e., a more than 80% ownership interest) in an entity that owns real property.

Those of us who regularly deal with large-scale property transfers in Maryland, which has historically had a lucrative multifamily and mixed-use market, will be scouring the details of this legislation in the coming weeks, as it may well have a chilling effect on a property market already enmeshed in a slowdown. Only time will tell...by the time the law takes effect next June, we may be in a completely different market (let's hope).

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