Maryland to Increase IDOT Exemption Threshold Effective July 1, 2024
- Under House Bill 371, the substantial increase to the threshold for IDOT recordation tax deferral in Maryland will result in significantly more opportunities for commercial real estate owners to save on recordation taxes when financing their real estate.
- Similar to 2013 legislation, this increased deferral threshold applies to single loans or a series of loans that are part of the same transaction.
The Bottom Line
Prior to a change in law in 2012, indemnity deeds of trust (IDOTs), also known as indemnity mortgages, had been used for decades in Maryland to defer recordation taxes on commercial real estate financing transactions. In an IDOT loan transaction, the borrower delivers a promissory note to the lender to evidence the loan. However, the borrower is not the owner of the real property that is to (indirectly) secure such a loan. Instead, the property owner, typically a third-party affiliate of the borrower, acts as a guarantor (IDOT Guarantor) of the loan, and delivers to the lender a guaranty of the borrower’s obligations under the note and other loan documents (IDOT Guaranty). The IDOT Guarantor grants an IDOT to the lender, which secures the IDOT Guarantor’s obligations under the IDOT Guaranty — not the borrower’s obligations under the promissory note — and encumbers the property owned by the IDOT Guarantor. The IDOT secures only the guarantor’s liability under the IDOT Guaranty, which is a contingent liability that is secondary to the borrower’s obligations under the promissory note and is conditioned on, typically, the borrower’s default under the promissory note or other loan document. Based on the contingent nature of the obligations secured by the IDOT, prior to July 2012, Maryland did not require payment of recordation tax on an IDOT at the time of recording the instrument in the applicable county land records office. Instead, collection of recordation tax, if ever, was deferred until a default on the loan by the borrower — the point in time at which the IDOT Guarantor’s contingent liability would become a non-contingent liability.
In 2012, the Maryland General Assembly changed the law to subject all IDOTs with respect to any loan of $1,000,000 or more entered into after July 1, 2012 to recordation tax when and to the same extent as the underlying debt is incurred as if the guarantor were primarily liable for the debt. This effectively eliminated any recordation tax deferral savings from all IDOTs except in the case of very small financings. In 2013, the Maryland General Assembly increased the threshold from $1,000,000 to $3,000,000.
How Does the 2023 Legislation Change Existing Rules?
Pursuant to House Bill 371, the Maryland General Assembly, in its 2023 session, further increased the threshold for IDOT recordation tax deferral from $3,000,000 to $12,500,000. This bill, which Governor Wes Moore allowed to become law without his signature, took effect July 1, 2024 and applies to instruments of writing recorded on or after July 1, 2024. Similar to the 2013 legislation, (i) the latest increased deferral threshold applies to a single loan or a series of loans that are part of the same transaction, and (ii) the threshold is a hard cutoff (meaning, if the size of the loan exceeds the threshold, recordation tax will be due on the full amount of the loan and there will not be a tax deferral on the portion of the loan that falls below the threshold).
Additionally, House Bill 371 requires either the tax collector or clerk of the Circuit Court in each county to monitor the effect of this change by submitting an annual report to the Maryland Senate Budget and Taxation Committee and the House Ways and Means Committee beginning July 1, 2025, and each July 1 thereafter. The report must include the following: (1) the total number of indemnity mortgages recorded that were exempt from recordation tax; (2) the amount of debt secured by each indemnity mortgage that was exempt from recordation tax; and (3) the amount of recordation tax revenue forgone by the county due to the indemnity mortgage exemption.
A Closer Look Back on the Statutory History of IDOT Recordation Taxes
In July 2012, the Maryland General Assembly passed Senate Bill 1302 declaring that all IDOTs recorded on or after July 1, 2012 were subject to recordation tax when and to the same extent as the underlying debt is incurred, as if the guarantor were primarily liable for the debt. The bill limited the recordation tax deferral for IDOTs to transactions where the IDOT secured a guarantee of repayment of a loan less than $1,000,000, which effectively eliminated the tax advantage of using IDOTs, instead of conventional deeds of trust, for loans of $1,000,000 or more.
How Did This Structure Change Again in 2013?
The Maryland General Assembly revisited IDOT recordation tax questions the following year in response to complaints from lenders and guarantors forced to deal with these aggressive changes to already established Maryland lending practices. Therefore, on July 1, 2013, the General Assembly increased the threshold for deferral of recordation taxes from $1,000,000 to $3,000,000. In addition to this, the General Assembly (1) required that a series of indemnity mortgages that are part of the same transaction must be considered as one for purposes of the recordation tax; (2) allowed indemnity mortgages recorded before July 1, 2012, to be amended without incurring the recordation tax on the original loan amount; (3) altered the definition of supplemental instrument of writing to include an instrument of writing that amends and restates a previously recorded instrument of writing regardless of whether the recordation tax was paid on such an instrument of writing; (4) specified that an indemnity mortgage that is recorded in multiple counties is not subject to the recordation tax on the full value of the mortgage in each county; (5) required that recordation tax be paid on the difference between the unpaid principal balance of the original loan and the amount of any new loan; and (6) allowed commercial mortgages, including indemnity mortgages, to be refinanced without incurring recordation tax in the same manner as residential mortgages (i.e., to only require recordation tax to be paid on “new money” — meaning the difference between the outstanding principal balance of the loan being refinanced and the balance of the new refinance loan).
How Can I Learn More?
Reach out to the real estate practitioners in Ballard Spahr’s Baltimore office for advice on IDOT and recordation tax issues or for other Maryland real estate needs.
The author is grateful for the assistance from Summer Associate Ryan Ricketts in the drafting of this alert.
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