FL DOC STAMPS DUE ON BANKRUPTCY TRUSTEE DEEDS – VOLUNTARY DISCLOSURE?
Since the real estate market started a free fall in 2008, Florida's foreclosure market has been a bellwether for how our economy has been doing. Struggling home owners, banks unable or unwilling to take action, and an overburdened court system have contributed to a stagnant housing market in Florida. At some point, prices dropped enough that a few investors began eyeing homes for long term investments. But other people saw the struggling court system and the sheer volume of unoccupied homes as an opportunity. Groups of investors became purchasing homes directly from the bankruptcy process and renting the homes out. In a market of extremely tight credit, the increase in single family rental homes was a godsend. Thousands of homes have been purchased out of the bankruptcy process through trustee deeds in Florida and thousands of families have found good homes. What could be wrong with this outcome you ask? Well, the Florida Department of Revenue decided that the state was not collecting enough tax on these economy saving deals. Welcome to the wonderful world of Florida Documentary Stamp Taxes.
Here's the typical scenario. A single family home finds itself in the bankruptcy process. The home might be worth $150,000, but have $200,000 of secured bank debt (mortgage) on the property. An investor offers $20,000 to the trustee for the home, subject to the mortgage. The trustee sells the home to the investor, which is usually a trust, subject to the mortgage. The investor records the deed and pays the documentary stamp tax on the value of the recorded deed at a rate of 70 cents per one hundred dollars. The investor has a renter lined up and starts collecting rent almost immediately. The bank still has not be paid and the investor begins negotiations with the bank to forgive part of the debt. The hope is that between the improving housing market and the fact the home is now being taken care, the home will go up in value and the investor can take advantage of the value appreciation as well as the rental income.
The problem is Florida doc stamps are also due on the balance of the mortgage encumbering the property, and very few investors have been paying the doc stamp tax on the mortgage. If the home had a $200,000 mortgage, then the doc stamp tax should have been $1,400. The dollar amount for a typical home is not astronomical, but if an investor bought 50 homes, then you can see how the dollar amount at issue is starting to get more substantial. Now consider that the Florida Department of Revenue can impose up to 50% of tax penalties and impose interest at prime plus 4% (currently at 7%). As one can easily see, the issue gets more alarming for the investors in this industry. Today, the same single home purchased in our example using a trustee deed has approximately $2,300 in taxes, penalties, and interest due.
If you or someone you know has been one of these investors, then you should take note of this next sentence. THE FLORIDA DEPARTMENT OF REVENUE KNOWS ABOUT THESE TRUSTEE DEED TRANSACTIONS AND IS TAKING STEPS TO COLLECT THE DOC STAMP TAXES. On February 12, 2014, the Florida Department of Revenue began sending notices to trustees involved in these types of transactions. The notices told the trustee that they can come forward and remit the tax and the state may be lenient. The problem remains, however, that the trustees mostly likely can't be held liable for the tax. It will be the investor/buyers that the state will go after, to which no such offer has been granted. There are rumors floating around that the state may grant immunity to these transactions, but since when does the department of revenue simply walk away from millions of dollars in taxes? The answer – it does not. That would be like an alligator passing up on eating a puppy just because it was cute. There may be ways to minimize the tax impact to investor/purchasers, but the Florida Department of Revenue is not going to simply walk away from this much tax revenue.
Likely, the best approach is to use the Florida statutes to your advantage. Florida has a very good Voluntary Disclosure Program that allows taxpayers who realize they under paid tax to come clean. The statutes allow for the abatement of penalties and potentially interest. Furthermore, the statutes provide the state will forgive the taxes that are older than 3 years old. However, the voluntary disclosure program is only available if the Florida Department of Revenue has not contacted you already. So, if you or someone you know has invested in Florida property purchased via bankruptcy trustee deed with a mortgage attached, then you need to get your voluntary disclosure application in ASAP. You don't have to know exactly what amount is due to apply for the program. You can figure out how much is due after you get accepted. This is important, but not every transaction would be subject to the tax. For example, if the property was purchased without the mortgage attached, then no additional tax would be due. If the home was purchased out of a pure foreclosure, without a bankruptcy, then the transaction may be exempt for tax as well.
If someone believes that they can just walk away from the tax, then they might want to read Florida Statute Sec. 213.29, which allows the Florida Department of Revenue to impose a 200% percent of tax penalties on each and every responsible party. This penalty will complete ignore all the legal protections of trusts, corporations, and limited liability companies.
If you have any questions about the Florida Department of Revenue's assault on these investors how are helping to save the Florida housing market, then please reach out to one of our attorneys. At Moffa, Gainor, and Sutton, PA, almost our entire practice is dedicated to fighting the Florida Department of Revenue. We also provide a free initial consultation. So what have you got to lose?
ABOUT THE AUTHOR: Mr. Sutton is a Florida licensed CPA and Attorney and a shareholder in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A. Mr. Sutton is in charge of the Tampa office of the firm and his primary practice area is Florida sales and use tax controversy. Mr. Sutton worked in the State and Local Tax department of a "big five" accounting firm for a number of years and has been an adjunct professor at Stetson University College of Law since 2002 teaching State and Local Taxation, Accounting for Lawyers, and Federal Income Tax I. You can read more about Mr. Sutton in his firm BIO.
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