Indemnity Deeds of Trust & Maryland Recordation Tax

The REAL Deal

The Maryland Legislature, in the June special session, passed a bill that will make Indemnity Deeds of Trust (IDOTs) securing $1,000,000 or more of indebtedness subject to Maryland’s State Recordation Tax (the rate of which varies from County to County), effectively ending the use of IDOTs in Maryland.

An IDOT works as follows:  A lender agrees to loan money to a borrower on two conditions:

(1)  That a 3rd party guarantees repayment of the loan; and

(2) That the guarantor executes a mortgage on real property to secure the guarantee.

This new provision is intended to eliminate a purported tax avoidance transaction in which for example an entity, in order to avoid recordation tax on a deed of trust, creates a limited liability company (LLC) and has the LLC borrow money with a third party as the guarantor of the debt.  In that case, no recordation tax is paid on the LLC borrowing or the third-party guarantee.

This change will have a significant impact on commercial real estate owners in Maryland who have been able to eliminate recordation tax based on the IDOT structure.

The new law goes into effect on July 1, 2012.  Borrowing transactions which are recorded on or after July 1, 2012 using IDOTs and securing amounts of $1,000,000 or more will be subject to the State Recordation Tax to the same extent as standard deeds of trust.

A work group is to be formed within the State Department of Assessments and Taxation to study the impact of the change, with a final report due to the Governor and General Assembly no later than December 31, 2012.   The fiscal impact is projected to generate additional local revenues of $35.7 million in fiscal year 2013.

Please contact Jane Brewer or Andy Bareham if you have any questions or require additional information

 The REAL Deal is prepared by Jane M. Brewer, CPA, MST,  Chair of the KatzAbosch Partnership/Real Estate Tax Group

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