Tax Type
Recordation Tax
Description
Property subject to recordation taxes
Topic
Exemptions
Property Subject to Tax
Date Issued
09-08-2004
September 8, 2004
Re: Request for Ruling: Recordation Tax
Dear **********
This will reply to your letter in which you request a ruling concerning the application of Virginia's recordation tax to specific transactions involving intermediary services.
FACTS
Your company (the “Agent”) provides intermediary and accommodator services for like-kind exchanges of real estate pursuant to Internal Revenue Code ("IRC") §1031. As part of these services, real property is transferred by deed to the Agent, which temporarily holds the property before the property is further transferred. You have asked whether these transfers are subject to recordation tax.
Under IRC § 1031, a taxpayer can defer a gain or loss on an exchange of real or personal property held for productive use in a business or for investment if property of a like kind is received as part of the transaction and is held either for productive use in a business or for investment. Because the direct or simultaneous exchange of property between taxpayers is not always feasible, like-kind exchange rules permit an exchange to qualify for like-kind treatment even if the replacement property is received before or after the relinquished property has been transferred, provided that specific identification and receipt requirements are satisfied. In other words, if certain conditions are met, a taxpayer may sell property to one party and purchase property from another party and still qualify for a tax deferral of any gain under like-kind exchange rules.
Typically, these multiparty exchanges are consummated through a qualified intermediary. Under such circumstances, a qualified intermediary would be assigned property from the seller and receive cash from the buyer, purchase replacement property and assign it back to the seller, and finally transfer the seller's relinquished property to the buyer. You request a ruling as to whether the recordation tax applies to the conveyance of real property to and from a qualified intermediary. Specifically, you request a ruling regarding the application of the recordation tax in the following scenarios:
In the first transaction, called an "Exchange First," an owner ("Owner") of investment property wants to dispose of property ("exchange property") prior to identifying property to be purchased ("replacement property"). The Owner transfers the exchange property to the Agent prior to finding replacement property. Once replacement property is found, the Owner arranges for its purchase. The Agent then transfers the exchange property to its purchaser. You ask whether the transfer of the exchange property from the Owner to the Agent in an Exchange First transaction is subject to Virginia transfer taxes.
In the second transaction, called an "Exchange Last," an Owner of exchange property also wants to dispose of the exchange property prior to identifying replacement property. In this case, however, the Owner finds replacement property prior to the finding a purchaser of the exchange property. The seller of the replacement property transfers the replacement property to the Agent pending the Owner's sale of the exchange property. Once the exchange property is sold, the Agent transfers the replacement property to the Owner.
DETERMINATION
Virginia Code § 58.1-800 et seq., imposes the state tax on the recordation of documents relating to real estate transactions. A recordation tax is imposed on any instrument admitted to record unless otherwise exempt by statute. Virginia Code § 58.1-801 imposes a state recordation tax of 25¢ on every $100 or fraction thereof of the consideration of the deed or the actual value of the property conveyed, whichever is greater. Virginia Code § 58.1-802 imposes an additional grantor's tax of 500 on every $500 or fraction thereof, exclusive of any lien or encumbrance remaining thereon at the time of the sale, of the consideration of the sale. Virginia Code § 58.1-814 permits any city or county to impose a recordation tax equal to 1/3 of the amount of state recordation tax.
Virginia Code § 58.1-811 provides exemptions from the recordation tax for certain transfers of real estate. We have been unable to identify any exemption that would apply to the two scenarios described above. Moreover, Title 23 of the Virginia Administrative Code ("VAC") 10-320-20(A)(1) provides examples of deeds taxable under Va. Code § 58.1-801 and includes a deed:
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[w]here real estate is conveyed to a "strawman" or nominee for the purchaser who paid the entire consideration and the title is taken in this form for the purchaser's convenience pursuant to an agreement. When the "strawman" or nominee conveys the property to the purchaser for no consideration, this second conveyance is also a taxable transfer based on the actual (fair market) value of the property at the time of the conveyance.
Based on the information provided, the "Exchange First" and "Exchange Last" transactions are analogous to transfers to a "strawman" for the purchaser's convenience as described in the regulation. Therefore, the "Exchange First" and "Exchange Last" transactions are subject to Virginia recordation taxes when property is transferred to the Agent and again when conveyed to the purchaser.
The Code of Virginia sections and regulations cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have any further questions, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
Kenneth W. Thorson
Tax Commissioner
- Sincerely,
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AR/47166B
Rulings of the Tax Commissioner