Anne Arundel Co. taxing forgiven debt on short sales
Should short sales be taxed differently than "regular" home sales?
Anne Arundel County thinks so. It's levying its recordation tax on the sales price plus any forgiven debt, and the Anne Arundel County Circuit Court is doing the same with state and county transfer taxes.
The county says it's not a policy change and it's just following the law. But real estate agents say it wasn't collecting taxes this way until last week, and that they discovered it the hard way -- by not being able to record sales that had already been to the settlement table.
A title industry trade group says it knows of no other government in the country handling short sales in this way. (Read more about the argument in today's story.)
You probably know what a short sale is if you're reading a blog with a name like "Real Estate Wonk," but just for form's sake, a quick explanation: It's a home sale with a contract price that's less than what the seller owes on his or her mortgage, and the lender is allowing it to go through without demanding all of the difference at closing.
The thing is, lenders are frequently leaving their options open on how they're going to deal with that debt, approving short sales but reserving their right to go after the borrower later. So says Andrew Levy with the Crofton-based Capitol Title Insurance Agency.
That "might or might not" situation isn't enough to get a short sale off the hook for being taxed on forgiven debt in Anne Arundel. The county's controller, Richard Drain, said parties to the sale need to provide solid documentation -- such as a promissory note -- to prove that the lender isn't going to forgive and forget.
The county is offering another way, he said. It will tax the sale on the fair-market value if the parties provide documentation, such as a recent appraisal, along with a hardship letter from the seller about his or her financial difficulties.
But the real estate industry is up in arms about the entire thing. Real estate agents say the sales price is a negotiated deal -- negotiated out the wazoo, usually, since lenders are involved -- and ought to be what the county taxes. And they think the hardship-letter requirement for the exemption violates sellers' privacy.
So: Are buyers getting a below-market steal on short sales, unfairly lowering the amount of taxes cash-strapped local governments can collect? Or is Anne Arundel overreaching? The Maryland Attorney General's office expects to weigh in, but in the meantime, let's hear what you all think.