The housing market collapse hit millions of Americans very hard. Struggling to make ends meet, and underwater on their homes, many homeowners were forced to give up their family homes in an effort to avoid balloon payments, large mortgages, or the inevitable end of very low payments on interest only loans. Florida, particularly South Florida, was extremely hard hit by the housing bubble. Thankfully, the economy is on the rebound, and housing prices have stabilized from the 2008 levels. One remnant still remains for some Florida homeowners. Florida Department of Revenue filed tax liens against many homeowners who surrendered their property in short sales. These liens are for documentary stamp taxes due on the transfer. Most homeowners were unaware of the requirement to pay doc stamps on a short sale. Because the nature of a short sale involves three parties, it was unclear to many who was liable for the tax, and what was the “consideration” on the sale.
In Florida, any document that transfers an interest in Florida real property, such as a deed or a mortgage, is subject to what is called a ‘documentary stamp tax.’ This tax is calculated based on the consideration received for the transfer of real property. The tax will be 70 cents for every $100 received by the seller as consideration for the property transfer. For example, a seller receiving $100,000 for the sale of a property would owe $700 in documentary stamp tax. Section 201.02(1)(a) Florida Statutes (“F.S.”) outlines what constitutes consideration, which can include money paid or agreed to be paid for the transfer or the discharge of an obligation. This is typically a very straightforward concept. When a buyer purchases a property from a seller, tax is due on the consideration paid for that transfer. During the mortgage crisis, around 2008, there was a high number of non-traditional sales. The banks were accepting value of less than the outstanding mortgage on the property from the buyer, and either forgiving the remaining debt, or restructuring that part of the debt so it no longer attached to the property, in a short sale transaction. This lead to confusion as to how much “consideration” was paid to the seller in this circumstance. Due to this confusion, Florida Association of Realtors sought guidance on the issue.
In 2008, a Technical Assistance Advisement, TAA 08B4-006 asserted that this cancelled debt should not be consideration for the transfer. The Department of Revenue’s rationale was that there were two unrelated agreements that transpired. The heart of the agreement of a short sale is akin to any sale of real property. A buyer is purchasing real property from a seller. The subsequent agreement between the lender and the seller, in which the lender agrees to cancel a portion of the seller’s outstanding debt, and is ancillary to the sale of the property subject to documentary stamp tax. This is extremely important, because it could be argued that the releasing of a seller’s obligation is consideration, as defined by the statute. As the forgiveness of the debt and the purchase of the property are viewed by the Department as two separate transactions, only the consideration associated with the sale is considered taxable.
While the lender has agreed to cancel a portion of the seller’s debt related to the property, they ultimately are not receiving any interest in the real property itself. What this means is that the forgiven debt is not subject to tax per the Florida Department of Revenue, only the price paid by the seller is considered “consideration” for purposes of documentary stamps. The rule of thumb is when the application of a taxing provision is unclear or ambiguous, the Department is bound to construe the taxing statute narrowly, in favor of the taxpayer.
About the Author
About the author: Amanda Levine is an associate attorney with the Law Offices of Moffa,
Sutton, & Donnini, P.A. Her primary practice area is Florida tax controversy,
including property tax issues. Ms. Levine received a B.S. in Accounting
from University of Central Florida. She spent several years working in
public accounting before attending Nova Southeastern University Law School.
She received her Juris Doctorate in 2014. During her time at Nova Law,
Ms. Levine was the Executive Justice of Academics for the Moot Court Honor
Society, as well as the Finance Chair. She was awarded by the National
Order of the Barrister, a national honor society which encourages oral
advocacy and brief writing skills. You may contact Amanda via email at
AmandaLevine@FloridaSalesTax.com or 954-642-1088 or read more about her in her
bio HERE.
Authority
201.02(1)(a) F.S. Tax on deeds and other instruments relating to real property or interests in real property
Additional Sources
FL DOC STAMPS DUE ON BANKRUPTCY TRUSTEE DEEDS, published Feb 15, 2014, by James Sutton CPA, Esq.
FL DOR TARGETS HOME OWNERS AFTER FORECLOSURE, published Feb 5, 2013 By Jerry Donnini, Esq.
FL TAX - VOLUNTARY DISCLOSURE CAN BE THE PERFECT SOLUTION, published October 5, 2012, by Jerry Donnini, Esq.