Tax Type
Recordation Tax
Description
Deeds of trust or mortgages; Fair market value of property
Topic
Rate of Tax
Date Issued
06-30-2000
June 30, 2000
VIA FACISIMILE
Re: § 58.1-1821 Application: Recordation Tax
Dear ****
This will reply to your letter in which you contest the additional assessment of recordation tax against the ***** (the ATaxpayer@) for a deed of trust by a circuit court clerk.
FACTS
In October of 1998, the Taxpayer recorded a credit line deed of trust with each of two localities (Locality A and Locality B). The recordation tax assessed on both recordings was based on the fair market value of the real property as stated by the Taxpayer in the respective localities which secured the deed of trust. The combined fair market value of the two properties was less than the maximum principal amount on the deed of trust.
In December of 1999, the Taxpayer filed a modification to the deed of trust in Locality A. At this time, Locality A imposed an additional recordation tax calculated on the maximum amount of the 1998 credit line deed of trust. The Taxpayer paid the additional recordation tax and appealed the assessment to the department.
DETERMINATION
Code of Virginia § 58.1-803 (A) (formerly § 58-55) provides in pertinent part that "[A] recordation tax on deeds of trust or mortgages is hereby imposed at a rate of 154 on every $100 or portion thereof of the amount of bonds or other obligations secured thereby . . . ."
The recordation tax is assessed on the amount of bonds or other obligation secured by the conveyance of property described in a deed of trust. The underlying obligation is a separate document that is not recorded and not subject to recordation tax. The underlying obligation may be secured by a combination of one or more deeds of trust and Uniform Commercial Code ("UCC") financing statements, and other arrangements involving possession of collateral or liens recorded by other means (e.g., on a motor vehicle's certificate of title). The tax is not imposed on the total amount of the bonds or other obligations described in a deed of trust, but on the amount that is secured by the property conveyed. Therefore, the amount secured by a recorded deed of trust can never be more than the fair market value of the property described and conveyed by the deed (including any realty required by the terms of the deed to be constructed). See Code of Virginia § 58.1-803 (A).
The tax will be based on the amount of the bonds or obligations when that amount is less than the fair market value of the property conveyed because the full amount of the obligation will be secured by the conveyance. The tax will be based on the fair market value of the property conveyed whenever the amount of the bonds or other obligations secured by the conveyance is not ascertainable. The tax will be limited to the fair market value of the property conveyed whenever the amount of the bonds or other obligations exceeds the value of the property conveyed. If the deed of trust explicitly states that some other amount is secured by the conveyance, and that amount is equal to or less than the fair market value of the property conveyed, then that will be the amount secured for purposes of calculating the recordation tax. See 1981-82 Report of the Attorney General 388 and Title 23 of the Virginia Administrative Code (VAC) 10-320-40, copies enclosed.
Code of Virginia § 58.1-803 (A) provides that in the case of an open or revolving deed of trust, the amount of the obligation equals the maximum amount which may be outstanding at any one time. However, because the tax is assessed on the conveyance of the secured property rather than the amount of the obligation, the tax will be limited to the fair market value of the property even if the maximum amount stated on the open deed of trust exceeds the fair market value of the property conveyed.
In addition, Locality A has asserted that the Taxpayer did not include certain other property as secured property when the original deed of trust was recorded. The Taxpayer contends that these properties (the "Properties") constitute personal property which has been perfected by a UCC statement. Virginia Administrative Code 10-320-40 (B)(2) provides that when a note is secured by property and a deed of trust on real estate, and personal property is secured by a filing under the UCC, the recordation tax is computed upon the real estate only.
When Virginia adopted the UCC effective January 1, 1966, it provided a new method of recording and perfecting liens in personal property. When parties use the UCC filing provisions instead of the real estate recordation system, they will not be subject to any recordation tax under Code of Virginia § 58.1-803. See 23 VAC 10-320-40(B)(2). Liens on fixtures may be-recorded under either the UCC or the real estate recordation system, or both. See Code of Virginia § 8.9-313 and § 8.9-402(6).
However, deeds of trust may still convey personal property in addition to real property, and if they do so the tax will be based on the value of all real and personal property conveyed by the deed of trust. See 1984-85 Report of the Attorney General 394, copy enclosed. Creditors may benefit from using the real estate recordation system for personal property because the UCC allows the option of selling personal property at a real estate foreclosure sale when the deed of trust conveys both real and personal property. Code of Virginia § 8.9501(4). A recent opinion of the Virginia Supreme Court describes just such a transaction:
In addition to the real property, the deed of trust describes the property encumbered thereby as "equipment and fixtures . . . and all items of personal property . . . now or hereafter used on or in connection with the Development."
****
Here, the notes and deed of trust clearly make reference to the real and personal property as the collateral for the loan. The advertisement refers to the deed of trust for a description of the property to be sold and expressly states that the personal property will be conveyed by bill of sale. This was adequate notice to Fox Run, and to any potential third-party bidder, that the personal property "used on or in connection with" Fox Run's housing project would be sold as part of the foreclosure.
See Virginia Housing Dev. Auth. v. Fox Run Ltd, 255 Va. 356, 497 S.E.2d 747 (1998). (Emphasis in original.) (copy enclosed)
If the deed of trust describes and conveys any personal property to secure the underlying obligation, then the value of the described personal property would be taxable if the tax is based on, or limited by, the fair market value of property conveyed by the deed of trust.
A review of the deed of trust shows the conveyance of numerous parcels that are described by metes and bounds and language such as "together with improvements thereon." In addition, the deed of trust conveys:
...all fixtures, fitting, appliances, apparatus, building materials, equipment, machinery and other articles personal property, and replacements thereof, now or at any time hereafter affixed to, attached to, placed upon, or used in any way in connection with the complete and comfortable use, enjoyment, occupancy or operation of the Improvements or the Premises ...
Therefore, any tangible personal property, as defined by the deed of trust, that was conveyed would also be subject to the tax. It is not possible to determine from the information provided whether the Properties were personal property as defined by the deed of trust or sufficiently attached to the real estate on the date of conveyance to be considered fixtures. The factors affecting such a determination have been discussed by the Attorney General and the courts. See 1987-88 Report of the Attorney General 532 and 1983-84 Report of the Attorney General 402.
Based on the evidence presented, the recordation tax paid based on the total obligation is greater than the fair market value of the real estate, fixtures and other personal property. A refund for the state portion of the recordation tax will be issued shortly. A copy of this letter will be forwarded to Locality A for disposition of the local portion of the tax. If you have any questions regarding this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/26406B
VIA FACISIMILE
Re: § 58.1-1821 Application: Recordation Tax
Dear ****
This will reply to your letter in which you contest the additional assessment of recordation tax against the ***** (the ATaxpayer@) for a deed of trust by a circuit court clerk.
FACTS
In October of 1998, the Taxpayer recorded a credit line deed of trust with each of two localities (Locality A and Locality B). The recordation tax assessed on both recordings was based on the fair market value of the real property as stated by the Taxpayer in the respective localities which secured the deed of trust. The combined fair market value of the two properties was less than the maximum principal amount on the deed of trust.
In December of 1999, the Taxpayer filed a modification to the deed of trust in Locality A. At this time, Locality A imposed an additional recordation tax calculated on the maximum amount of the 1998 credit line deed of trust. The Taxpayer paid the additional recordation tax and appealed the assessment to the department.
DETERMINATION
Code of Virginia § 58.1-803 (A) (formerly § 58-55) provides in pertinent part that "[A] recordation tax on deeds of trust or mortgages is hereby imposed at a rate of 154 on every $100 or portion thereof of the amount of bonds or other obligations secured thereby . . . ."
The recordation tax is assessed on the amount of bonds or other obligation secured by the conveyance of property described in a deed of trust. The underlying obligation is a separate document that is not recorded and not subject to recordation tax. The underlying obligation may be secured by a combination of one or more deeds of trust and Uniform Commercial Code ("UCC") financing statements, and other arrangements involving possession of collateral or liens recorded by other means (e.g., on a motor vehicle's certificate of title). The tax is not imposed on the total amount of the bonds or other obligations described in a deed of trust, but on the amount that is secured by the property conveyed. Therefore, the amount secured by a recorded deed of trust can never be more than the fair market value of the property described and conveyed by the deed (including any realty required by the terms of the deed to be constructed). See Code of Virginia § 58.1-803 (A).
The tax will be based on the amount of the bonds or obligations when that amount is less than the fair market value of the property conveyed because the full amount of the obligation will be secured by the conveyance. The tax will be based on the fair market value of the property conveyed whenever the amount of the bonds or other obligations secured by the conveyance is not ascertainable. The tax will be limited to the fair market value of the property conveyed whenever the amount of the bonds or other obligations exceeds the value of the property conveyed. If the deed of trust explicitly states that some other amount is secured by the conveyance, and that amount is equal to or less than the fair market value of the property conveyed, then that will be the amount secured for purposes of calculating the recordation tax. See 1981-82 Report of the Attorney General 388 and Title 23 of the Virginia Administrative Code (VAC) 10-320-40, copies enclosed.
Code of Virginia § 58.1-803 (A) provides that in the case of an open or revolving deed of trust, the amount of the obligation equals the maximum amount which may be outstanding at any one time. However, because the tax is assessed on the conveyance of the secured property rather than the amount of the obligation, the tax will be limited to the fair market value of the property even if the maximum amount stated on the open deed of trust exceeds the fair market value of the property conveyed.
In addition, Locality A has asserted that the Taxpayer did not include certain other property as secured property when the original deed of trust was recorded. The Taxpayer contends that these properties (the "Properties") constitute personal property which has been perfected by a UCC statement. Virginia Administrative Code 10-320-40 (B)(2) provides that when a note is secured by property and a deed of trust on real estate, and personal property is secured by a filing under the UCC, the recordation tax is computed upon the real estate only.
When Virginia adopted the UCC effective January 1, 1966, it provided a new method of recording and perfecting liens in personal property. When parties use the UCC filing provisions instead of the real estate recordation system, they will not be subject to any recordation tax under Code of Virginia § 58.1-803. See 23 VAC 10-320-40(B)(2). Liens on fixtures may be-recorded under either the UCC or the real estate recordation system, or both. See Code of Virginia § 8.9-313 and § 8.9-402(6).
However, deeds of trust may still convey personal property in addition to real property, and if they do so the tax will be based on the value of all real and personal property conveyed by the deed of trust. See 1984-85 Report of the Attorney General 394, copy enclosed. Creditors may benefit from using the real estate recordation system for personal property because the UCC allows the option of selling personal property at a real estate foreclosure sale when the deed of trust conveys both real and personal property. Code of Virginia § 8.9501(4). A recent opinion of the Virginia Supreme Court describes just such a transaction:
In addition to the real property, the deed of trust describes the property encumbered thereby as "equipment and fixtures . . . and all items of personal property . . . now or hereafter used on or in connection with the Development."
****
Here, the notes and deed of trust clearly make reference to the real and personal property as the collateral for the loan. The advertisement refers to the deed of trust for a description of the property to be sold and expressly states that the personal property will be conveyed by bill of sale. This was adequate notice to Fox Run, and to any potential third-party bidder, that the personal property "used on or in connection with" Fox Run's housing project would be sold as part of the foreclosure.
See Virginia Housing Dev. Auth. v. Fox Run Ltd, 255 Va. 356, 497 S.E.2d 747 (1998). (Emphasis in original.) (copy enclosed)
If the deed of trust describes and conveys any personal property to secure the underlying obligation, then the value of the described personal property would be taxable if the tax is based on, or limited by, the fair market value of property conveyed by the deed of trust.
A review of the deed of trust shows the conveyance of numerous parcels that are described by metes and bounds and language such as "together with improvements thereon." In addition, the deed of trust conveys:
...all fixtures, fitting, appliances, apparatus, building materials, equipment, machinery and other articles personal property, and replacements thereof, now or at any time hereafter affixed to, attached to, placed upon, or used in any way in connection with the complete and comfortable use, enjoyment, occupancy or operation of the Improvements or the Premises ...
Therefore, any tangible personal property, as defined by the deed of trust, that was conveyed would also be subject to the tax. It is not possible to determine from the information provided whether the Properties were personal property as defined by the deed of trust or sufficiently attached to the real estate on the date of conveyance to be considered fixtures. The factors affecting such a determination have been discussed by the Attorney General and the courts. See 1987-88 Report of the Attorney General 532 and 1983-84 Report of the Attorney General 402.
Based on the evidence presented, the recordation tax paid based on the total obligation is greater than the fair market value of the real estate, fixtures and other personal property. A refund for the state portion of the recordation tax will be issued shortly. A copy of this letter will be forwarded to Locality A for disposition of the local portion of the tax. If you have any questions regarding this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/26406B
Rulings of the Tax Commissioner