Mid-Atlantic Health Law TOPICS

You have just shaken hands on an agreement to buy or sell your health care practice, which includes Maryland real estate. You have agreed on the purchase price and the other relevant terms of the deal. But then you wonder: What will the recording taxes be? Is there any way to reduce them? Who will pay them? 

Multiple Recording Taxes

Maryland recording taxes are complicated – and they are high. In some counties, the recording taxes total 1.5% or less, but the recording taxes total 3.75% of the amount of some transactions in Baltimore City, and the marginal rate of the recording taxes may total 3.77% of the purchase price of real property in Montgomery County.

Depending on the type of transaction, the location of the property, and the amount of money involved, as many as four different recording taxes may apply.

Those taxes are the recordation tax (a Maryland state tax imposed at the rate set by each individual jurisdiction), the state transfer tax, the local transfer tax (each of the 24 Maryland jurisdictions may impose its own transfer tax and set its own rate, and most of them do), and the Baltimore City yield tax (applicable for transactions over $1,000,000).

Click here to find the taxes in each Maryland jurisdiction.

Exemptions

All of these taxes are applicable to documents conveying title (such as deeds, contracts, leases, and assignments). If you are financing the purchase of Maryland real estate, you should be aware that the recordation tax and the Prince George’s County transfer tax also apply to mortgages and deeds of trust.

Fortunately, there is an exemption for mortgages and deeds of trust to the extent that the amount secured is all or part of the money used to buy the property that is the security for the loan. These instruments are called purchase money mortgages or purchase money deeds of trust.

In addition to the purchase money mortgage exemption, there are a number of other exemptions from the recording taxes that are applicable in particular transactions. Exemptions include transfers to certain relatives of the seller and transfers to certain affiliates of entities. These exemptions need to be considered each time a document is to be recorded in the land records.

Sales of Controlling Interests

People often ask whether they can sell the entity that owns the Maryland real estate and avoid the recording taxes, rather than selling the real estate itself. Since 2008, Maryland has imposed a tax on the transfer of a “controlling interest” in a “real property entity” that is equal to the tax on the transfer of the real property.

For purposes of this statute, the term “controlling interest” means more than 80% of the equity interests in the owner of the real estate, “real property” means Maryland real estate, and “real property entity” means an entity that owns real property that constitutes at least 80% of the value of the assets of the entity and has a value of at least $1 million.

Fortunately, the same exemptions that are applicable for a transfer of real property are also available if there is a transfer of a controlling interest in a real property entity.

Who Pays?

In commercial transactions, either party may pay the recording taxes, and the taxes may be divided in any way that the parties choose. It is the custom in Maryland that sellers and buyers each pay one-half of the applicable recording taxes.

Consideration paid for the Real Estate

What is the amount on which recordation taxes are based when a health care practice is sold? The sale may include real property, and a deed conveying that real property will trigger recording taxes. But the sale will often include other types of assets, including tangible and intangible personal property. Will recording taxes be based on the full purchase price or only on the value of the real property?

A 2021 decision of the Appellate Court of Maryland titled Shelter Senior Living IV, LLC v. Baltimore County is instructive. In that case, the owners of senior living facilities in Rockville, Towson, and White Marsh sold them to the same buyer for about $93 million. The sellers and the buyer claimed that only a little more than $40 million of the price was for the real property, and that the balance was for tangible and intangible personal property, including goodwill.

The sellers tried to have the deeds recorded with payment of recordation taxes based on $40 million, but the recording officials refused to record unless the taxes were paid on the full purchase price.

The sellers lost their argument at the lower levels of the judicial system, but they succeeded on appeal. The Appellate Court held that “the tax collectors must calculate the tax on the consideration paid only for the subject real property and must exclude consideration paid for other types of assets, such as intangible property, that are not subject to such taxes.”
 

Edward J. Levin
410-576-1900 • elevin@gfrlaw.com