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Real Property, Trust and Estate Law Journal

Fall/Winter 2022

The Legal History, Incongruous Variations, and Outer Reaches of the Real Estate Transfer Tax

Charles Allen Szypszak


  • Clients may not know how much it can vary in other states or consider how the variations can affect real estate prices and investment.
  • Real estate transfer taxes are often overlooked in public tax discussions.
  • The legal basis for the tax, describes its formulations, and analyzes the dynamics of its impact.
The Legal History, Incongruous Variations, and Outer Reaches of the Real Estate Transfer Tax
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Author’s Synopsis: Real estate transfer taxes have been around a long time, but they receive scarcely any attention in public discussions about tax law and policy. While real estate practitioners may be familiar with a transfer tax in their work, they and their clients may not know how much it can vary in other states or consider how the variations can affect real estate prices and investment. Although real estate transfer taxes are a relatively small contributor to state tax revenues, they can be finan-cially weighty to those buying or selling real estate, amounting to several thousand dollars or more.

This Article provides background about the evolution of the real estate transfer tax, from a colonial stamp tax to a widely varying state tax. Some states’ constitutions forbid it; some states aim a tax at common real estate transactions; other states impose a tax at a relatively high rate and extend it even to complex transfers of interests in real estate holding companies. This Article examines the legal basis for the tax, describes its formulations, and analyzes the dynamics of its impact. The analysis includes consideration of two significant issues about the outer reaches of state transfer taxes: their application to foreclosures, including when there are claims of federal exemption, and when there is a transfer of control without a conveyance by deed.

I. Introduction

Real estate transfer taxes receive scarcely any national attention in public discussions about tax law and policy. Although mostly inconspic-uous since American colonists opposed a British stamp tax in 1765, a real estate transfer tax has long been used in the United States for revenue collection. It has evolved from a simple federal charge for a document stamp to a tax that varies widely across the country. Some states’ constitu-tions forbid it; some states aim a tax at common real estate transactions; other states impose a tax at a relatively high rate and extend it even to complex transfers of controlling interests in real estate holding companies. Although it is a relatively small contributor to state tax revenues, it can be financially weighty to those buying or selling real estate, amounting to several thousand dollars or more, and research shows it can have a significant impact on prices. Despite the many different ways a transfer tax can affect real estate purchases and investment, there is no reason to conclude that state policy and law makers carefully analyze transactional realities in a way that makes the tax well-considered.

Part I of this Article provides background about the evolution of the real estate transfer tax, from a colonial stamp tax to a widely varying state tax on transfers of real estate interests. Part II analyzes the dynamics of the tax, including its impact on real estate transactions. Part III describes the basic nature of state versions of the tax and exemptions from it, with examples from states with very different approaches. Part IV analyzes two significant issues about the outer reaches of state real estate transfer taxes: their application to foreclosures, including when there are claims of federal exemption, and their application to the transfer of controlling interests in a company owning real estate when there is no conveyance by deed. In its entirety, this Article illuminates a tax that too easily escapes the attention that state and local policy makers should pay to it.

II. The Stamp Tax Legacy

Excise taxes levied on the sale or consumption of products are an integral part of tax systems in market economies. Some scholars argue that excise taxes are better than income taxes because, among other things, they can encourage saving and target those of better financial means who spend on luxuries. Excise taxes can also be a policy tool for discouraging activities deemed harmful, as has been the case with efforts to control consumption of liquor, tobacco, and gasoline.

Governments have long looked to an excise tax on deeds and other legal instruments as a public revenue source, including lawmakers in the American Colonies. Legislation imposing such a tax was once known as a “stamp act” because it required affixation of a stamp to a document as evidence of payment. Years before movement toward independence, the Massachusetts Bay Colony adopted such a tax in 1755, to be effective for two years, at 4 pence for a deed when the consideration for the transfer was 20 pounds or more (0.08% at 20 pounds consideration), and 2 pence when the consideration was less than 20 pounds. Just a few months later, the Colony of New York passed its stamp act to be effective for one year, with the higher rate of 4 pence for all deeds.

At their low rates, the colonies’ stamp taxes were insignificant as a financial burden. Compliance was a practical bother because the parties had to get the stamp from a government appointed commissioner. Of even greater concern, the stamp tax legislation contained provisions for challenging the legal force of a document lacking a stamp that could cause a register of deeds to refuse to record a deed without it. Since the colonial period when settlors first claimed private ownership of the land, recording has been necessary to give constructive notice of ownership and to protect against competing claims. Without having properly recorded a deed, a transferee would not have the necessary rights and good title to convey the real estate or use it as security for a loan. Taxing authorities therefore had considerable legal leverage to cause payment of the tax.

Stamp acts were appealing to taxing authorities for the additional reason that they were easier to collect than other common forms of taxation at the time, including excise taxes on wine and liquor. Stamp taxes did not require searches of homes to discover products on which taxes should be paid. Stamp taxes were naturally unpopular among attorneys who handled legal documents, and among newspaper publishers who had to pay them. There is no evidence, however, that the Massachu-setts and New York stamp taxes were especially unpopular or doomed by protests. The states appeared to allow the taxes to sunset after their initial terms expired because they did not produce enough revenue to justify their continuance, particularly in a political climate in which all taxes were unpopular.

Those who are generally familiar with American history will likely know about the colonial reaction toBritish imposition of a stamp tax in 1765, which was among the triggering events in a revolutionary move-ment.The British stamp tax applied to deeds, mortgages, and security bonds, among other things. The Stamp Act was enacted to increase revenue to pay for the substantial expenses of defending the colonies during the Seven Years War with the French. Unlike the stamp taxes enacted by the colonies, which were based on the amount of consideration for a transfer, the British tax was based on the acreage of the conveyance. For land in the colonies not exceeding 100 acres, the tax was 1 shilling (12 pence) and 6 pence; 2 shillings for above 100 and not exceeding 200 acres; and an additional 2 shillings and 6 pence for each additional 320 acres. Though the revenue from this tax would not be substantial, British Prime Minister George Grenville insisted on affirming Parliament’s prerogative to tax the colonies in this way.

Widespread opposition to the stamp tax centered on the symbolism of its enactment without colonial legislatures having any say. While Parliament discussed strategies for enforcing the stamp tax against resistant colonies, Benjamin Franklin, a publicist and colonial political leader, remained in England as a representative of Pennsylvania. In 1766, he gave testimony to Parliament about the tax, telling the lawmakers that the tax was onerous because the revenue was not used to support the colonies. He said, “They cannot force a man to take stamps who chooses to do without them. They will not find a rebellion; they may indeed make one.” In response to the question, “If the act is not repealed, what do you think will be the consequences?,” Franklin answered: “A total loss of the respect and affection the people of America bear to this country, and of all the commerce that depends on that respect and affection.” Other influen-tial colonial leaders echoed the tone.

The Stamp Act was short lived. British merchants, feeling the effects of colonial protests and boycotts, petitioned Parliament for relief, and Prime Minister Grenville fell out of favor. In 1766, William Pitt gave a stirring speech against taxation without representation, and Parliament repealed the Stamp Act less than a year after it was published. As a historian described the forces in England behind the repeal, there was no “denying the economic power of the merchants who presented” petitions for it.

Someone familiar with colonial opposition to the British stamp tax may be surprised that not long after formation of the United States the federal government looked to stamp taxes for revenue. Alexander Hamilton played a leading role in framing the U.S. Constitution and establishing a federal revenue system. When deciding how the federal government should collect needed revenue, he was especially concerned about direct taxes, such as a federal tax on real estate, because of the unequal land value and capacity for commerce among the states. He also viewed excise taxes on imports and commodities such as liquor and tobacco as a better way to constrain the federal government from abusing its taxing powers. According to Hamilton, the federal government could be trusted with less constrained authority to impose excise taxes because there was a natural limit to how much could be collected. As he explained,

If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

For policy makers to adhere to Hamilton’s wisdom about the limits of an excise tax, they would need to consider how the tax affects the transactions on which they are imposed.

The U.S Constitution incorporated Hamilton’s preference for excise taxes in Article I, Section 8, which states in its first clause, “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.” As the U.S. Supreme Court later ex-plained, an excise tax is something that involves a choice to purchase or engage in a business, and “there is nothing in the Constitution requiring such taxes to be apportioned according to population.” Also consistent with Hamilton’s views, direct forms of federal taxation were made subject to a more onerous apportionment requirement. Clause 4 of Section 9 of the Constitution provides, “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.” The apportionment requirement aimed to prevent the federal government from imposing a tax that would fall disproportionately on citizens of states that had more of the object of taxation but a smaller population and thus less representation in Congress.

The different restrictions on excise and direct taxes naturally led to legal challenges about whether a particular tax was one or the other. In an early case, the U.S. Supreme Court held that a uniform tax on carriage ownership was constitutional as an excise tax against a claim that it was a direct tax and had to be apportioned. As the Supreme Court later explained, excise taxes need not be apportioned, but they “cannot be one sum upon an article at one place, and a different sum upon the same article at another place.” At no time during the imposition of the federal real estate stamp tax did a court hold that it violated this constitutional uniformity requirement.

Congress enacted a stamp tax during Washington’s Administration, in the Fifth Congress, in 1797. The tax was imposed on bonds, notes, and certificates of stock, but not on deeds. Not everyone acquiesced in a federal stamp tax. Antifederalists, opposed to the expansion of federal powers, were appalled by the initiatives in the U.S. Congress to impose internal taxes of the same nature Parliament inflicted on the colonies. As the federal government grew, however, the stamp tax became a means to raise money during war time. In 1813, Congress imposed a series of taxes to raise revenue for the War of 1812, including a stamp tax on notes and bonds. During the Civil War, the federal government imposed a graduated stamp tax on deeds, among other things, at the rate of $20 for a conveyance with consideration of $20,000 (0.1%), plus an additional $20 for every additional $10,000 (0.2% of the additional) greater than $20,000. During the First World War, the federal government reinsti-tuted a stamp tax at the rate of $0.50 per $500 of consideration (0.1%) if the consideration exceeded $100. Beginning when the country was preparing for the Second World War, and until the end of 1967, the federal stamp tax was slightly higher at $0.55 per $500 of consideration (0.11%) if the consideration exceeded $100.

Taxpayers could purchase deed stamps for the federal excise tax, available in various denominations, at post offices and local Internal Revenue Service offices; the act required parties to affix the stamp to the deed before presenting it to a state register of deeds for recording. Local government registers of deeds were the gatekeepers for ensuring compliance, based on the appearance of the stamp. But they had no direct financial incentive to enforce compliance with the federal law requirement.

The federal government discontinued its stamp taxes effective January 1, 1968, as part of a major restructuring of the national tax regime. In 1967, the sale of federal documentary stamp taxes resulted in $68 million in gross revenue in 1967, a tiny part of $148 billion in federal tax revenue. According to a state legislative study of the federal tax, the Internal Revenue Service “devote[d] minimal effort to the enforcement of documentary stamp taxes” because of the relatively small amount of revenue collected. A United States Senate Finance Committee reported that excise taxes, “for the most part, were initially levied as emergency revenue-raising measures” and “not developed on any systematic basis.” The committee noted, “In the case of real estate conveyances, there is no effective means of Federal administration. Therefore, your committee agrees with the House conclusion that this latter tax could better be left to the administration of State or local governments.” The Senate Finance Committee noted that concerns were raised about the loss of data about real estate sales, and said, “For that reason, States may want to impose this tax, or adopt alternative valuation procedures, as the Federal Government removes itself from this field of taxation.”

The usefulness of a stamp tax for collecting data about real estate values was a point to be considered in states considering such a tax. For example, in 1967 the North Dakota Legislative Research Committee said, “It is realized that the Act will not generate a great deal of revenue since something less than $187,000 per year is estimated, but the principal purpose of the bill is the information which will be yielded for assessment purposes.” Of course, the information collected about real estate sales based on stamp taxes depended on the completeness and accuracy of the parties’ declarations of consideration in compliance with the stamp requirement, as well as the register of deeds’ attention to collecting and reporting this information. The committee also said, “Although repre-sentatives of the real estate industry contend that such information is not completely valid, the Committee members feel that such information is very useful when a large number of transactions are examined and consideration is given to the type of transactions involved.” This point and other arguments in favor of a state excise tax did not prove to be persuasive in North Dakota, or other states that opted against a real estate transfer tax. In North Dakota, opposition to the tax was so strong that the state legislature’s prerogative was later foreclosed. In 2014, at the urging of realtors and home builders, voters approved a legislatively referred constitutional amendment as follows: “The state and any county, township, city, or any other political subdivision of the state may not impose any mortgage taxes or any sales or transfer taxes on the mortgage or transfer of real property.”

States are not constrained by the same uniformity or apportionment requirements to which U.S. Congress is subjected in the U.S. Constitution. As the U.S. Supreme Court summarized, “We have long held that the means States adopt to collect their taxes ‘should be interfered with as little as possible.’” States may exempt certain types of property from taxation, which they commonly do for religious and charitable uses. States are constrained by the Equal Protection Clause, which, as the U.S. Supreme Court said in 1946, “protects the individual from state action which selects him out for discriminatory treatment by subjecting him to taxes not imposed on others of the same class.” Similar property must be taxed in basically the same way, but federal courts are deferential to a state’s choice of valuation methods provided they are not arbitrary.

Some state constitutions prohibit real estate transfer taxes, but more typically all taxation is subject to general language requiring equality and uniformity in taxation. The Pennsylvania Constitution, for example, pro-vides simply as follows: “All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.” Pennsylvania’s constitution authorizes the legislature to except specifically listed real estate uses from taxation, which in other states is often left to legislative discretion. The Pennsylvania Supreme Court has said its state courts will uphold legislative classifications for tax purposes as long as they are reasonable. For example, the court upheld the state real estate transfer tax when an owner challenged the tax on the ground that it is unfair to parties that do not have the benefit of an exemption given to others. The state’s tax law imposes a single tax on a transaction, but provides that the federal and state government and their instrumentalities are exempt, in which case the other party to the transaction must pay the full tax. The court said, “It is well established that, in matters of taxation, the General Assembly possesses wide discretion, and a tax enactment will not be invalidated unless it ‘clearly, palpably, and plainly violates the Constitu-tion.’” The court concluded that requiring the nonexempt party to pay the full tax “functions in a non-discriminatory manner to ensure that equal revenues will be collected for all non-excluded transfers of real estate occurring within the Commonwealth.” Other state courts are similarly deferential to legislative discretion about state taxes.

III. The Dynamics of a Real Estate Transfer Tax

Much has changed about real estate ownership and transactions since excise taxes were seen as a naturally limited form of taxation. During the colonial and early federal periods, as much as ninety percent of the population lived on farms, and owners sought to accumulate land for wealth and political influence. Today, more than sixty-four percent of the population lives in owner-occupied homes, and on average an owner sells real estate eight years after buying it. For real estate held only a few years, a real estate transfer tax of a few percent may be equal to or exceed any appreciation in the price that can be realized upon a sale. Given the prices of real estate today, especially in metropolitan areas, a tax equal to a few percent of real estate’s purchase price can be a significant financial imposition. A single commercial real estate deal can be for several billion dollars, and single homes can sell for more than $100 million. Most homeowners pay a purchase price that is several times their annual incomes, with payment made possible by mortgage loans that on average are for about seventy-seven percent of the purchase price. The tax imposed on the sale can therefore have a significant financial impact because it is a large sum for an expensive property, or because it will consume or exceed any net value an owner has after paying off a mortgage and closing costs. The details of this impact depend on policy decisions made in state and local governments about having the tax, its rate, and to what transactions it will apply. The widely divergent ways in which these policy decisions are made belie any assumption that they are the product of a finely tuned and ongoing analysis.

Most states have had a real estate transfer tax in place since the federal government repealed its stamp tax in 1967. The tax can be collected in more obscurity than income and sales taxes. Unlike when paying other kinds of taxes, many of those who pay the real estate transfer tax may be surprised to encounter it. Even its name can be confusing. Unlike the conspicuous annual property tax based on assessed value, the transfer tax is imposed on a transaction, as often or as infrequently as the real estate is transferred. As such, payment can be mistakenly bundled in mind with recording fees that registers of deeds charge, although it is not tied to the costs of processing—registers charge other fees for that.

Another reason the real estate transfer tax may be misunderstood is its application to consideration at the time of sale—not the owner’s gain. By comparison, the Internal Revenue Code allows a taxpayer to exclude from taxable income the gain from the sale of real estate owned and used as a principal residence for at least two of the five years before the sale. The exclusion is for up to $250,000 for a single taxpayer and $500,000 for married taxpayers. This exclusion is part of a decades-long federal policy of giving tax advantages to those who sell a residence. Subjecting every private real estate sale to an excise tax based on the amount of consider-ation contrasts sharply with this policy.

Basing the real estate transfer tax on consideration also pays no heed to the economic consequence of a conveyance for the taxpayer. In the ordinary course, from the consideration paid, on which the tax is based, the transferor-seller must pay other considerable expenses associated with the sale, such as attorneys’ fees and the broker’s commission. In addition, the seller must pay the loan balance on any outstanding mortgage. An owner who is selling for less than what the real estate cost still pays the full tax, as does an owner who must apply all of the sale proceeds to discharge a mortgage and pay closing costs. In states in which the transferee-buyer is required to pay some or all the transfer tax, the tax is purely an addition to the price, not a portion of any gain.

As discussed below, basing the real estate transfer tax on consider-ation for the transfer also raises fundamental questions about transparency and fairness in foreclosure contexts. Exempting foreclosure sales may seem like an accommodation for financially troubled homeowners, but homeowners are not necessarily the beneficiaries of a tax exemption. Nonpayment may in fact benefit lenders who purchase foreclosed real estate for later resale at a higher price. Nonpayment may also benefit investors in secondary mortgage markets that rely on net profits from mortgage lending, such as Fannie Mae and other associations, who are interested in maximizing their gains upon resale of real estate acquired through foreclosure. Excluding only transactions that occur after a foreclosure process has been undertaken gives no relief to homeowners who sell at the margin between sale price and what is owed and must be repaid.

Another fundamental difference between the real estate transfer tax and the annual property tax is the way rates are set. The annual property tax rate is set in a political process to meet annual revenue requirements. The owners who must pay the tax receive a conspicuous bill from the taxing authorities, with the threat of substantial interest charges and sale at foreclosure for nonpayment. To increase the rate for the annual property tax, the local government must get voter approval. The real estate transfer tax is not subject to any accountability of this nature. It generally remains unchanged from year to year and encountered only when real estate is transferred. For the taxing jurisdiction, revenue will increase over time from real estate appreciation and new development, as well as from an increase in the volume of transactions during heated markets. These dynamics mean taxing jurisdictions can experience increased revenue without having to ask voters for a rate increase. The real estate transfer tax therefore tends to keep its status quo in obscurity, while still producing revenue gains, without forcing policy makers to consider the effect of the tax on prices.

A sounder approach to considering the realities of having a real estate transfer tax would involve studying the impact of the tax on real estate prices and housing affordability. Considerable research about the tax in the United States and abroad shows that changes in the tax can have a significant impact on these matters.

Several studies have concluded that a real estate transfer tax has a direct negative impact on a seller’s price. For example, researchers studied the effects of a real estate transfer tax imposed in Toronto, Canada, in 2008. The tax was 0.5% of the consideration for the transfer when it was less than $55,000 (CAD), 1% for consideration between $55,000 and $400,000, and 2% when for higher consideration. The researchers stud-ied transactional volumes and sales prices and concluded that the tax caused a 14% decline in the number of sales, and a decline in housing prices about equal to the tax, which they analyzed to be a substantial welfare loss—in large part to the disincentives the tax created against moving to Toronto.

A study of the effects of an increase in the real estate transfer tax in Philadelphia concluded that it caused sellers to drop their prices in an amount even greater than necessary to lessen the tax burden of the sale. The study found that although the buyer and seller usually split the tax, with a tax increase “not only will the seller absorb his half of the tax, but will lower the price of the unit by the full amount of the tax nominally charged to the buyer and absorb her half as well.” Other researchers analyzed data from seventeen million properties that were offered for sale in Germany during 2005-2019, which included apartments, apartment buildings, and single-family housing. They found that an increase in the tax during that period lowered the price by more than the amount of the tax for all three types of housing. By their calculations, a one percent increase in the tax “reduces prices of apartments and apartment buildings by roughly 4% and single-family house prices by 2% in the 12 months after the reform.”

Other studies have shown that changes in a real estate transfer tax also have an impact on the volume of sales and preferences for types of real estate. A study of real estate transactions in the United Kingdom from 2004 to 2012 found that “the housing market respond[s] . . . [very strongly] and quickly to transaction taxes . . . .” This market reaction includes an uptake in the volume of real estate transactions when there is a cut in the tax rate, and shifts in some price brackets but not others. A study done for the Finnish government looked at how the market reacted when the transfer tax rate was increased for housing cooperatives but not for single family residences. As the researchers predicted, the tax increase on cooperatives negatively affected the transaction volume of such units over the long-run, which may have caused shifts from purchasing them to purchasing single-family houses.

Researchers have also found that real estate transfer taxes with progressive rates distort the market and cause “price bunching” below the price notch at which a higher tax is triggered. A study of real estate transfer taxes in New York and New Jersey found that this shift is greater than the amount of tax. As the researchers described, “estimates robustly in-dicate that about $20,000 worth of transactions shift to the threshold in response to the $10,000 tax.” They said an empirical analysis of the large number of transactions at the notch that did not occur, compared to the number that were bunched below the notch, “suggests that there are productive transactions that do not occur because of the notched tax.” Similarly, economics researchers studied a tax notch in Washington, D.C. that was created in 2003, when the transfer tax rate was raised from 2.2% to 3% for real estate that sold for $250,000 or more. They found “evidence that there was manipulation of the sales price to the lower-tax-rate region around the price notch, as well as widespread awareness of the tax changes and the incentives they created.” They did not find evidence that the parties changed the timing of their conveyance to avoid the higher tax; instead, they adjusted the price. Other studies also have shown that an increase in the tax has an overall negative effect, including a study of real estate transactions in Germany. National legislation gave German states the authority to raise real estate transaction tax over the period 2007 to 2015, resulting in an increase of the median rate to five percent. The study theoretically compared revenue gain to the costs of transactions that did not occur and tax-sheltering activities. The study concluded that the increase in the tax discouraged mutually beneficial transactions and caused tax-sheltering in a way that had an overall welfare cost.

The basic reality shown by this research—that parties to real estate transactions will adjust their prices to avoid real estate transfer taxes—shows the error of assuming that increasing the tax rate will result in a correlative increase in tax revenue. Policy makers should consider the net tax gain or loss after sellers adjust their prices in response to the tax. The preceding studies also indicate there may be a net welfare loss due to the other effects of the tax. One aspect that deserves careful study is the reality of real estate owner capacity to absorb payment of the tax or make price adjustments in efforts to avoid it. A study of real estate transfer taxes in Illinois demonstrated that the taxes are higher in communities with lower medium incomes. The author concluded, “This means that municipal transfer taxes tend [sic] affect most those who have the least.” The author also argued that “in a State with perpetually rising property taxes, policy-makers should train a skeptical eye on additional real-estate related taxes, particularly when they harm the State’s most vulnerable residents.”

While the effects of a real estate transfer tax are not typically matters of careful consideration, when the public’s attention is drawn to the tax there is an apparent sense of unfairness. This is shown by successes in state constitutional amendments to prevent legislatures from enacting the tax. For example, in 1992, Colorado voters approved a taxpayers’ bill of rights that amended the state’s constitution to prohibit any new imposition of real estate transfer taxes. In 2010, Missouri voters approved an amendment to the state’s constitution to prohibit the state and any political subdivision from imposing any new real estate transfer tax. Proponents of the amendment portrayed a transfer tax as a “double tax” in addition to the annual property tax, and they argued that a constitutional prohibition was necessary because transfer taxes were “appealing options for tight government budgets during difficult times.” In 2011, Louisiana voters amended their constitution to prohibit any new real estate transfer taxes. That same year voters approved an amendment to the Montana Constitution, stating simply, “The state or any local government unit may not impose any tax, including a sales tax, on the sale or transfer of real property.” North Dakota took this step in 2014.

Political winds within a state also can work to block policy makers from turning to additional real estate transfer taxes. Between 1985 and 1989, the North Carolina General Assembly authorized an additional transfer tax of up to 1% in 7 of the state’s 100 counties. The tax can bring a surge of revenue, especially in an active, appreciating real estate market. For example, in Dare County, where there are valuable beach properties, a real estate boom in 2021 resulted in transfer tax revenue jumping from a budgeted $5 million to $17 million. Dare County took advantage of a window of opportunity for counties to enact their own transfer taxes. Shortly after Dare and the other six counties imposed the tax, the General Assembly repealed a statute that would enable other counties to adopt it. The same kind of reaction has happened in other states. For instance, in 2014, Kansas became the first state to repeal an existing excise tax on real estate documents when the state legislature enacted a phased repeal of its tax on mortgage recordings. A national realtors association attributed the repeal to its lobbying efforts. In 2022, in Teton County, Wyoming, in the midst of a booming real estate market with high-valued homes, representatives from the county sought state legislation to allow a one percent tax on properties valued over $1.5 million, arguing that the revenue was needed to build housing for the workforce. The proposal failed by a wide margin. Similarly, a Massa-chusetts local government land bank’s initiative for a local option real estate transfer fee of up to two percent to fund affordable housing quickly died in a legislative committee due to the well-organized opposition of the real estate industry. The success of such opposition to the tax suggests that its continuance in other jurisdictions may be due more to absence of focused opposition than to public acceptance of the tax as a fair and coherent public revenue source.

IV. State Transfer Tax Variations

With the common real estate transfer tax procedure, the tax is paid to a register of deeds based on an amount the person recording the deed reports as having been paid. While the process for paying the tax is basically the same in all the states that have it, the extent to which it has an impact on the transaction naturally will vary depending on the applicable tax rate and available exemptions, which vary greatly among the states and sometimes within a state.

A. Basic Application and Rates

Thirty-five states and the District of Columbia have a real estate transfer tax, either state-wide, or by state authority given to local jurisdictions. Typically the tax must be paid at the register of deeds office when the deed is recorded. Some states have requirements about forms to document payment of the tax, either to be filed with the register, or with a tax department, or both. Although some state statutes refer to the value of the real estate as the amount to which the tax rate is applied, rather than consideration, in practice the value is presumed to be the sale price. For some transfers not involving a typical sale of real estate, the tax will be based on fair market value of the real estate or real estate holding company, such as when a shareholder transfers real estate to a wholly owned entity. A few jurisdictions also have a tax that applies to mortgage instruments based on the amount of the loan.

The amount of the real estate transfer tax in most states is less than 1% of the consideration. Some states have graduated rates. Delaware has the highest state-wide rate at 3%, with the possibility of a total tax of 4% if a county or municipality exercises an option to impose a tax of 1.5%, in which case the state tax is 2.5%. Some states target particularly valuable properties. In New York City, for example, there is a “mansion tax” on properties worth more than $1 million. In some jurisdictions, the tax is a disincentive to the sale of a particular kind of real estate. A stark example of use of the tax in this way is Maryland’s “Agricultural Transfer Tax and Surcharge,” which imposes a five percent tax on sales of more than twenty acres of farmland.

Among the states with a real estate transfer tax, three examples illustrate the extent to which they can vary: North Carolina, New Hampshire, and Pennsylvania.

North Carolina is an example of a state that has a traditional stamp tax that applies to basic real estate conveyances upon the recording of a deed. It has not been expanded to apply to transfers of control over real estate without recording a deed, such as by transferring the stock or membership interests in a real estate holding company. North Carolina imposes the tax on the transferor at the rate of $1 on each $500 or fractional part of the consideration, with no graduated rate for more expensive real estate. Seven of the one hundred counties have an additional one percent local tax. In a state with $27 billion total state revenue, the real estate transfer tax contributed $88 million, which is a small 0.37% of the total. In a North Carolina county that has an additional local tax, in a recent year the revenue from it contributed about $8 million to the county’s $175 million budget, which is a more significant 4.5% of the budget.

New Hampshire’s rate is higher than North Carolina’s, at $0.75 on each $100, with a minimum of $20 if the consideration is $4,000 or less, on both the transferor and the transferee. New Hampshire is an example of a state that also applies its transfer tax to transfers of ownership interests in companies that have real estate assets, when there is no deed recorded. With a recent $6.1 billion budget, New Hampshire had $158 million in real estate transfer tax revenue, which is 2.6% of the budget.

Pennsylvania is an example of a state that has complex statutes and rules, the application of which may not be easily anticipated. The state has a relatively high state-wide rate at 1%, with local options that can be as high as in Philadelphia where the total rate is 4.278%. At the state level, the tax recently contributed $832 million to the state’s $44 billion annual revenue, or about 1.9%. Philadelphia recently budgeted a significant $293 million for the real estate transfer tax to contribute to the city’s $4.6 billion general fund, or about 6.4%.

The variations in real estate transfer tax rates among these three states are illustrated in the following table, using a national median house sale price:

About half of the states with real estate transfer taxes also authorize all or some local governments to have an additional tax. There are many different approaches to extending such authority. Sometimes, all munici-palities have the option. Other times, a particular municipality may be authorized to have its own tax. For example, California authorizes all counties to collect a transfer tax, and cities within those counties may collect half that amount with a credit toward payment of the county tax. New York City is an example of a local government with a comparatively high real estate transfer tax pursuant to specific statutory authority. Connecticut authorizes nineteen municipalities identified as a “targeted investment community” by the state’s Department of Economic and Community Development to collect an additional real estate transfer tax. Colorado has twelve towns that were authorized to continue to have a real estate transfer tax after a taxpayer’s bill of rights in 1992 prohibited any new real estate transfer taxes. Ophir, Colorado, has the highest rate in Colorado at four percent. Given the variations illustrated by these examples, anticipating a tax in a particular municipality as a practical matter usually is a matter of recent experience or consulting the register of deeds office where the real estate is situated.

B. Exemption Variations for Common Transfers

Real estate transfer tax statutes generally impose the tax on the reported amount of consideration for a deed that is being recorded, unless an exemption is claimed. In general, consideration is the gross amount that a seller receives, without respect to the buyer’s source of funds. While, as noted above, some states have a mortgage excise tax, others explicitly make clear that there is no tax on a deed conveying a security interest such as a deed of trust or mortgage deed. All states have at least several other types of general exemptions, and some have many more. Pennsylvania law, for example, has a list of twenty-five categories of excluded transactions, some of which are nuanced and the subject of interpretive regulations. The extent to which exemptions vary can be surprising. Some exemptions represent policy choices about particularly desired projects in the taxing jurisdiction. For example, New Hampshire has exemptions for real estate used for affordable housing, and Pennsyl-vania exempts the tax on real estate used for certain kinds of agriculture, industrial development, and conservation. Some states target certain kinds of buyers for special protection from the tax. For example, Delaware state law, which imposes a relatively high real estate transfer tax, also authorizes a county transfer tax of up to a certain rate and includes a required exemption for first-time home buyers of up to a certain amount of consideration.

This section addresses differences in how the states serving as examples in this Article—New Hampshire, North Carolina, and Pennsylvania—treat six common types of transfers that occur other than by a straightforward deed of conveyance from a seller to an unrelated buyer. These examples show variations in exemptions for conveyances involving government units and instrumentalities, leases, transfers by will or intestacy, transfers from common ownership by operation of law, transfers involving trusts, and transfers incident to divorce.

In general, states do not collect real estate transfer taxes from federal, state, and local governments and their instrumentalities. The three example states illustrate variation even in how they address this basic exemption. In New Hampshire, where a tax is imposed on both the transferor and the transferee, exemptions include “a transfer of title to” a state or local government or agency. Accordingly, the tax does not apply if a state or local government or agency is the transferee of a deed, but it does apply to a government or agency transferor. New Hampshire statutes have another provision for the federal government. The statute says the tax does not apply “[t]o the United States, or any agency or instrumentality thereof.” This means the non-governmental party must pay its share of the tax when the transfer involves the federal govern-ment. Unlike New Hampshire’s tax on both parties, North Carolina taxes only one: the “person conveying an interest in real estate . . . other than a governmental unit or an instrumentality of a governmental unit.” Accordingly, there is no tax due when a governmental unit or instrument-ality is the transferor, but the statute says a full tax must be paid when the unit or instrumentality is a transferee. As noted in the next part below, state statutory imposition of the tax may be to no avail if the transferee claims transactional exemption under federal law. In Pennsylvania, where there is joint seller and buyer liability for a single tax, the statute provides that a government and its instrumentalities are exempt from the tax, but this exemption does not “relieve any other party to a transaction from liability for the tax,” which the Pennsylvania Supreme Court has interpreted as requiring the non-exempt party to pay the full tax. The Pennsylvania statutes also have a transactional exemption for “[a] document which the Commonwealth is prohibited from taxing under the Constitution or statutes of the United States.”

States also take various approaches to applying the real estate transfer tax to leases. In North Carolina, leases simply are not subject to the tax. The New Hampshire statutes are not so sweeping. They provide that the tax does not apply “[t]o a lease, including any sales, transfers, or assignments of any interest in the leased property, where the term of the lease, including all renewals, is less than 99 years.” The New Hampshire Department of Revenue Administration regulations are more specific about renewals, stating that the tax applies when the lease term is “[f]or a period of less than 99 years and renewal rights could extend the total period of time . . . more.” The operative word in this regulation is could; merely having an option to extend would be enough to trigger the tax on a lease. Note, however, that the aggregate permissible duration for avoiding the tax is long.

Pennsylvania applies its real estate transfer tax to leases through its definition of what is “title to real estate,” the transfer of which is taxable, to include leases of more than thirty years. Where Pennsylvania gets even more complicated than New Hampshire is with how Pennsylvania treats options to renew. The state’s statute provides, “In determining the term of a lease, it shall be presumed that a right or option to renew or extend a lease will be exercised if the rental charge to the lessee is fixed or if a method for calculating the rental charge is established.” A Pennsylvania Department of Revenue regulation states, “Renewals or extensions at the option of the lessee at fair [market] value at the time of the renewal or extension are not included in determining the term of a lease.” This interpretation makes economic sense because leaving the rent for an extension to be determined at a market rate conveys far more limited rights to the lessee than a negotiated, set future rent. The depart-ment once took a very narrow view about what constitutes setting the rent at fair market value. It assessed a tax of $12,455 on a ground lease that set the renewal rent at fair market value with a dispute resolution process if the parties could not agree on that value. Contrary to the department’s position, a Pennsylvania appeals court held that the dispute resolution mechanism did not alter the reality that the rent would qualify as based on fair market value, and the court said that the department was not following its own regulation. This case illustrates how difficult it can be to anticipate whether a real estate transfer tax applies, even for the revenue agencies charged with interpreting the governing statutes.

The statutes in all three states provide an exemption for transfers of title by will or intestacy. New Hampshire has an exemption for “transfers that occur by devise or by other testamentary disposition, or by the laws regulating intestate succession and descent.” Two of North Carolina’s basic exemptions are for transfers “[b]y or pursuant to the provisions of a will” and “[b]y intestacy.” Pennsylvania’s exemptions are not so simply stated because the tax is imposed on a document, not the transfer. The list of excluded transactions addresses a situation in which someone is recording a deed to show how real estate ownership already passed upon someone’s death. Excluded transactions include “[a] transfer for no or nominal actual consideration of property passing by testate or intestate succession from a personal representative of a decedent to the decedent’s devisee or heir.” Pennsylvania Department of Revenue regulations identify some circumstances in which the tax could still apply, including when they involve changes in a party’s inherited share that is not subject to another exemption such as for transfers between family members.

Real estate commonly is owned by more than one person. There are several forms of co-ownership, including joint tenancy, in which each joint tenant has full ownership rights and a survivor automatically becomes sole owner; tenancy by the entireties, which is like joint tenancy but only for spouses; and tenancy in common, by which the deceased co-tenant’s prop-erty passes separately to that co-tenant’s heirs or beneficiaries. Making an exemption from the tax for such an automatic transfer of title is logical as a practical matter because usually no instrument of conveyance is recorded when the event occurs. Subsequent purchasers and lenders will rely on proof of the death as sufficient evidence that the survivor acquired full rights. Someone might want to record an instrument that confirms the transfer, however, to make the real estate title clear, as may be the case if there is no readily accessible public record of the co-owner’s death. The states’ real estate transfer tax statutes address this situation in differing ways.

The North Carolina statutes are simple on this point. Among the few listed exemptions from the tax is a transfer “[b]y operation of law.” The New Hampshire statutes reach basically the same result. Although the statutes say the tax applies to any transfer “including transfers by operation of law,” the listed exemptions include “transfers that occur by devise or by other testamentary disposition, or by the laws regulating intestate succession and descent, or by the death of any cotenant in real estate held by joint tenancy; regardless of any consideration paid or obligation assumed by the transferee.” Accordingly, transfers at the death of some-one holding an interest as a tenant in common would pass free of the tax as a matter of testamentary or intestate succession, and the transfer upon survivorship of a joint tenant is expressly an exemption. The Pennsylvania real estate transfer tax statutes and regulations take a different approach. By statute, the tax is triggered when someone presents a document for recording. Interpreting an early version of the state’s stamp tax, the Pennsylvania Supreme Court held that no tax was due upon the recording of a confirmatory deed of a transfer that occurred by operation of law. The court said that such a deed “did not fall within the category of a ‘document’ subject to the tax.” The Pennsylvania Department of Revenue has since issued regulations stating that such a confirmatory deed is not taxable, but warns that the tax does apply if the deed does something more than merely confirm interests automatically transferred, which would be the case, for example, if the percentage of ownership interests are changed.

The states’ real estate transfer tax treatment of transfers to and from trustees is complicated by the many different ways trusts can be used for ownership. Trusts can have a wide range of purposes and complexity. Common uses for estate planning include living and irrevocable trusts with which the trust settlor is also trustee for the settlor’s lifetime, with the real estate going to a named beneficiary after death. Trusts can also be used for sophisticated international investment purposes, such as real estate investment trusts that hold multiple investment properties and are publicly traded on major securities exchanges. A trust’s purpose and complexity likely is not apparent in a deed presented for recording, other than a general impression based on the naming of the trust and trustee. Beneficiaries are not typically shown on a deed or on any other document recorded with it. Beneficiaries usually are identified on a separate schedule that is not recorded. Consequently, a register of deeds has very limited information to use when scrutinizing a deed to which a trustee is a party to determine if the real estate transfer tax applies.

In New Hampshire, most transfers involving a trustee will be subject only to a minimum tax. This includes basic estate planning trusts in which the transferor and the trustee are the same, as well as when a trustee gives a deed to the trust’s beneficiaries upon a death. Such transfers are deemed to be for no consideration on which a tax is owed. In North Carolina, most transfers to and from trustees similarly are not subject to the tax. The statutes provide an exemption for a gift and for transfers “[i]f no consideration in property or money is due or paid by the transferee to the transferor.” In both New Hampshire and North Carolina, a transfer to or from a trustee for consideration, such as occurs with a real estate invest-ment trust, will be taxable the same as any other transfer.

Pennsylvania’s transfer tax statutes and regulations aim to be more precise about what trustee transfers are exempt. There are several detailed statutory exemptions pertaining to trusts. For example, the statutes differently address a “business trust” that divides gain for beneficiaries, a “living trust” created during a settlor’s lifetime from which distributions can only be made to the settlor prior to the settlor’s death, and an “ordinary trust” that may have beneficiaries other than the settlor. A transfer to a living trust for no consideration is not taxed. But the statute also provides, “No such exemption shall be granted unless the recorder of deeds is presented with a copy of the living trust instrument.” Transfers to “ordinary trusts” are only exempted if the beneficiaries are among those to whom transfers can otherwise be made free of the tax, such as spouses and children. The state’s Department of Revenue regulations give the following example:

G transfers real estate to a trust without consideration for the use of B, G’s spouse, for life. Under the trust, the remainder interest is vested in G’s church. As a direct transfer to the religious organization would be taxable, the transfer to the trust is fully taxable.

Business trusts do not benefit from these exemptions. These and other rules regarding treatment of trusts in Pennsylvania may be tough to untangle even for someone who regularly works with such matters.

Another common circumstance in which questions arise about appli-cation of the real estate transfer tax is when divorcing spouses divide their property and one transfers a real estate interest to the other. Under federal tax law, a spouse who transfers property to another spouse does not incur tax liability if the transfer “is incident to the divorce.” The Internal Revenue Code provides that a transfer “is incident to the divorce if such transfer—(1) occurs within 1 year after the date on which the marriage ceases, or (2) is related to the cessation of the marriage.” Internal Revenue Service regulations explain that the tax-free transfer can also be pursuant to a separation agreement, including a modification to an agreement that is made within six years after marriage. The states vary in their provisions regarding exemptions for conveyances made incident to a divorce, rarely as expansively as the federal income tax code.

New Hampshire exempts “transfer[s] of title between spouses pursuant to a final decree of divorce.” By its terms, this exemption applies when a divorce decree includes the transfer of real estate from one spouse to the other regardless of who is receiving the value of the real estate in the property distribution. A deed recorded as part of a property settlement prior to entry of a decree would not seem to qualify. The North Carolina statutes are silent about whether a transfer incident to divorce is subject to the real estate transfer tax, leaving registers of deeds and the parties to divorces to rely on legal analysis to determine if the deed is exempt. A reasonable interpretation is that no tax is due because of the nature of marital ownership and tenancy by the entireties under state law. In North Carolina, division of marital property can involve allocations of different whole assets to each of the spouses so that the sum of their shares is in the appropriate equitable proportion. Each spouse is effectively treated as already owning awarded assets. The Internal Revenue Service interprets such an allocation of assets as a nontaxable division with no gain or loss, an analysis that seems reasonable for state transfer tax purposes.

Pennsylvania’s real estate transfer tax law has a different variation for transfers between spouses. It exempts any transfer between a husband and wife if it occurs while they are still married, “except that a subsequent transfer by the grantee within one year shall be subject to tax as if the grantor were making such transfer.” This means that a tax will be triggered if the spouse who receives full ownership adds a new spouse to the deed within a year. A Pennsylvania Department of Revenue regulation explains that the exemption for divorces applies also to transfers between “[p]ersons who were previously married but who have since been divorced, if the transferred realty was acquired by both spouses or by either spouse before or during their marriage.”

The surprisingly different ways the tax applies is not a feature that can fairly be associated with a transparent tax system. The wide variations among taxing jurisdictions, and the complex nature of common exempt-ions, increase the possibility that those involved in real estate transactions will encounter a tax upon recording that they did not anticipate when they agreed to a price. As a practical matter, anyone but a careful legal profes-sional familiar with the intricacies of the tax is likely to rely on the register of deeds for information about whether a tax applies and its amount. Registers in most states do not typically have a law degree or specialized tax training. The complexity of many of the rules also increases the likelihood that full enforcement of the tax in situations other than the obvious may depend on the auditing and enforcement efforts of the taxing jurisdiction. Jurisdictions vary in the extent to which they make such efforts. While states such as Pennsylvania have taxing authorities that issue detailed regulations and bring enforcement actions including litigation, other states, such as North Carolina, have no requirement for filing a declaration of the tax and no local or state agency that audits real estate transfers for nonpayment. Such variations in approach are yet another reason to question the extent to which the real estate transfer tax is fair and transparent.

V. Challenges at the Outer Reaches of a Real Estate Transfer Tax

The preceding section of this Article illustrated how application of the real estate transfer tax to common real estate transfers can vary among the states to a surprising extent. These variations are due to policy choices that state legislatures express in legislative enactments about the amount of the tax and on what transactions it is to apply. Among the more perplexing challenges about fairness in application of the tax are those involving transfers in a foreclosure context, which often encounter claims of federal mortgage association exemption, and use of business organizational tech-niques to accomplish transfers of valuable real estate without recording a deed.

A. Foreclosure and Mortgage Association Immunity

A mortgagee or deed of trust beneficiary will have a right to foreclose upon a borrower’s default according to the terms of the mortgage or deed of trust. The most conspicuous way in which a borrower’s default can be resolved is with a foreclosure auction, with the proceeds applied to pay the borrower’s debt. In a threatened or actual foreclosure context, transfers commonly occur in a number of other ways. Borrowers may be able to arrange a “short sale” with the lender’s cooperation, allowing a sale to a third party at a price lower than the amount owed on the mortgage, but sufficient from the lender’s perspective because it avoids costs and other financial losses involved with the foreclosure process. Either before the lender begins a foreclosure procedure, or at some point during it, a lender might reach an agreement with a borrower to take the property by a “deed in lieu of foreclosure,” saving foreclosure costs in exchange for forgiveness of debt. Transfers also occur in different ways when there is a non-judicial or judicial foreclosure sale at public auction. If no third party offers to purchase at a price that is reasonable to the lender, or that does not satisfy obligations under state law to protect the borrower’s equity, the lender might purchase the property itself for a price that meets those requirements and then look to market and resell it. Once having taken title, the lender may be able to sell the property for more than was paid at foreclosure, after advertising and affording purchasers with fuller information and better financing options. There can be different financial realities resulting from these various courses of action, the details of which are not disclosed in a deed recorded under threat of foreclosure or after foreclosure. Whether the real estate transfer tax applies depends not on such financial realities, but on the laws of a particular state and status of the foreclosing lender.

New Hampshire’s real estate transfer tax statutes do not exempt conveyances made pursuant to foreclosure or in lieu of foreclosure, and the state’s Department of Revenue has issued a regulation confirming that the tax applies in such circumstances. Accordingly, a mortgage lender will incorporate the amount of the tax when calculating the best course of action for a troubled mortgage. When considering the possibility of a deed in lieu of foreclosure, the lender needs to consider that a tax will be due twice: once with the deed from the borrower to the lender, and again when the lender conveys to a third party. If there is to be a foreclosure sale, the lender will look for proceeds sufficient to cover the indebtedness and foreclosure costs including the tax.

North Carolina’s statutes imposing a state-wide real estate transfer tax also do not exempt transfers by foreclosure or in lieu of foreclosure. Conversely, the local real estate transfer tax that the state has authorized for seven counties exempts a transfer to the secured creditor by foreclosure or in lieu of foreclosure. Those who record such instruments in North Carolina are easily confused about this distinction. The chapter in the statutes governing mortgages and deeds of trust provides that transfer taxes do not “apply to instruments conveying an interest in property as the result of foreclosure or in lieu of foreclosure to the holder of the security interest being foreclosed or subject to being foreclosed,” except that taxes “levied by Article 8E of Chapter 105 of the General Statutes” do apply. Article 8E of Chapter 105 creates the statewide excise tax on real estate conveyances. The statute therefore only makes the separate county excise tax inapplicable to transfers resulting from foreclosure, leaving the statewide excise tax collectible in all counties. The result of the exemption from the county excise tax means the impact of the real estate transfer tax is the same in all counties.

Pennsylvania’s real estate transfer tax statutes make an exception for a deed in lieu of foreclosure, as does Philadelphia’s tax code. The state Department of Revenue’s regulations specify that to qualify as a deed in lieu of foreclosure under the statute “there must be evidence that the mortgagor is in default of the terms of the mortgage loan, which default would permit the mortgagee to foreclose on the mortgage.” The department broadly construes what constitutes a default. The department says that in addition to “a failure to remit mortgage payments,” a default “can also include any other failure to comply with a mortgage term that would allow the mortgagee to foreclose on the mortgage loan.” As proof of such a default, the department will accept “the actual filing of a mortgage foreclosure action or written notice from the mortgagee to the mortgagor of the mortgagee’s intent to foreclose.” Accordingly, the parties need to create a record of steps toward foreclosure to claim exemption from the tax. Philadelphia introduces yet another subtlety for its tax. If the transfer does not qualify for an exemption because the mortgagee is the purchaser, or the foreclosing mortgage holder is exempt under federal law, or otherwise, the tax must be paid first out of the proceeds of the sale, and to the extent there are insufficient sales proceeds to pay the entire tax, the purchaser must pay the balance.

The full picture of financial consequences in foreclosure contexts is further complicated by sweeping immunity claims available to mortgage associations under federal law. Such claims have been the subject of disputes across the country with state and local taxing jurisdictions, due to questions about the legal basis for tax exemption and the evolution of the associations claiming it. The associations that dominate ownership through foreclosure originated in 1938, when the U.S. Federal Housing Authority created the Federal National Mortgage Association, which came to be known as Fannie Mae, to establish a market for federally insured mortgages and to finance housing projects. After a series of restructurings, in 1968 Fannie Mae became a fully privately owned corporation. It purchases mortgages, packages them into securities for sale, and invests in such securities itself. In a single recent year, Fannie Mae provided financing for 5.5 million homes. Fannie Mae has more than $4 trillion in assets, with operations that include acquiring homes after foreclosing on mortgages and reselling them through real estate professionals and directly to home buyers. Federal Home Loan Mortgage Loan Corporation, known as Freddie Mac, was created in 1970, to further expand the secondary mortgage market. In 1989 Freddie Mac became wholly privately owned. It has a mortgage portfolio of more than $3 trillion. Together, these associations hold a majority of the single-family mortgages in the United States. Fannie Mae holds thirty percent of single-family mortgages nationally, while Freddie Mac holds twenty-eight percent. In recent years, Fannie Mae held more than 20,000 properties valued at more than $2 billion, and Freddie Mac held more than 7,000 properties valued at $780 million. The large presence of Fannie Mae and Freddie Mac in foreclosures and re-sales has significant implications for state real estate transfer tax revenue.

The legal basis for the associations’ claim of exemption stems from the federal legislation creating them. The federal statute establishing Fannie Mae in 1938 provides that the association and its mortgages and holdings are “exempt from all taxation now or hereafter imposed by . . . any State, county, municipality, or local taxing authority.” This provision also provides exceptions for the exemption, stating that “any real property of the Association shall be subject to [taxation] to the same extent according to its value as other real property is taxed.” Congress included essentially the same language in the legislation creating Freddie Mac in 1970. Nothing in the legislative history indicates that Congress had real estate transfer taxes specifically in mind for either association’s exemption.

Local governments confronted the impact of a federal association exemption on transfer taxes in the wake of the 2008 mortgage crisis. Counsel handling closings for the associations in a flood of foreclosure sales and deeds in lieu of foreclosure claimed exemption from state and local real estate transfer taxes based on the aforementioned exemption language. As the U.S. Court of Appeals for the Seventh Circuit described the events:

at the same time that Fannie found itself for the first time making frequent sales of property that it had foreclosed on, . . . the states (including their subdivisions, such as counties) found themselves in dire need of additional tax revenues but reluctant to impose or increase taxes that would drive business and people to lower-tax states.

The associations’ claim could be justifiably surprising to local governments. The associations pay annual property taxes on real estate they hold in accordance with the exemption language in the federal statutes saying the associations are nonetheless subject to state and local taxes “according to its value as other property taxed.” The transfer tax also is based on the value of the real estate being conveyed. Taxing jurisdictions from across the country challenged claims of exemption. For example, Oakland County, Michigan, which is northwest of Detroit and part of its metropolitan area, claimed the enterprises owed the county “in excess of millions of dollars” for nonpayment of the tax on re-sales of properties acquired at foreclosure. The tax revenue for even a single transaction can be substantial for a local government. In one reported example, Freddie Mac sued a Maryland county for a refund of a $696,000 tax on a $58 million property sale.

In a leading case in 2013, the Seventh Circuit upheld the claims of exemption against challenges from Illinois and Wisconsin, with reasoning that became settled law across the country. The Seventh Circuit pointed to the statutes’ language that the associations are exempt from “all taxation” except property taxes based on value, and the historical distinction between direct taxes based on value—the annual property tax—and “various forms of excise tax, including sale or transfer or inheritance taxes.” As the Seventh Circuit noted, the Founders stressed this distinction when requiring apportionment of federal taxes on real estate while requiring uniformity for excise taxes. The court of appeals also upheld the exemption against constitutionality challenges. As the court summarized: “No provision of the Constitution insulates state taxes from federal powers granted by the Constitution, which include of course the power of Congress ‘to regulate Commerce with foreign Nations, and among the several states . . . .’” Other circuits reached the same conclusions.

The federal courts of appeals cases may have settled the question about a real estate transfer tax when Fannie Mae or Freddie Mac is otherwise a taxable party on a deed. Questions remain, however, about payment of the tax when these associations are involved in a less direct way in foreclosure contexts. The potential confusion is illustrated by an attorney general’s opinion given years before the federal court litigation. In North Carolina, the real estate transfer tax statute requires the transferor on a deed to pay, but not if the transferor is a governmental unit or instrumentality. The common form of security instrument used in North Carolina is a deed of trust, which is functionally the same as a mortgage, but has the legal form of a transfer by an owner to a third-party trustee, who holds title as security for the loan and is bound to re-convey the title to the owner after the loan has been repaid. If the borrower defaults, the trustee conveys title by foreclosure deed to a buyer at the foreclosure sale. The secured lender is not a named party to a foreclosure deed unless as the buyer-transferee. In 1972, Fannie Mae’s regional counsel asked the North Carolina Attorney General for an opinion about whether the tax applies when Fannie Mae purchases the real estate upon the trustee’s foreclosure. The attorney general’s opinion did not dissect the state statute or Fannie Mae’s party capacity as a potential transferee on a deed. The opinion said legal title did not matter; what mattered was a foreclosing secured creditor’s “practical ownership” of the real estate, and in that capacity, the opinion concluded, Fannie Mae is federally tax-exempt. As persuasive authority for this interpretation of a secured creditor’s “practical ownership,” the North Carolina Attorney General’s opinion cited a 1962 federal district court opinion from Pennsylvania in which the court held a stamp tax was not required for a deed to the United States pursuant to a court order to enforce a judgment. The case did not involve a broad claim to immunity based on secured party status. At the time, Pennsylvania’s stamp tax was a single tax payable when a document was presented for recording, and the court said that under federal law the tax could not apply to the federal government. The case, therefore, did not base an exemption on a theory of practical ownership. The North Carolina Attorney General’s interpretation made a conceptual leap that bolstered the associations’ later claims to a broad exemption.

The New Hampshire Department of Revenue Administration’s regulations are an illustration of how taxing authorities can be wary of claims to exemption under federal law. A regulation provides: “If a person or entity is a party to a transaction with the United States government, that person or entity shall be liable for payment of the applicable portion of the tax . . . .” After listing several exempt agencies such as the Government National Mortgage Association, but not including in the list Fannie Mae or Freddie Mac, the regulations state that for other claims the presenter should show evidence that the exemption is valid. This can be by reference to status as a federal agency or instrumentality. If such evi-dence is not presented, the register is to advise the department’s audit division “of the parties to the transfer and the book and page number of the recording.”

Mortgage associations have practices to maximize avoidance of real estate transfer taxes in transactions involving their mortgage portfolios. The associations use servicers to collect and process mortgage payments and to process foreclosures. Fannie Mae instructs its servicers to initiate foreclosures in their own names but that “the jurisdiction in which the security property is located will affect how the foreclosure proceedings are conducted or initiated.” The instructions continue by warning that the servicer must be prepared to “have title vested in Fannie Mae’s name in a manner that will not result in the imposition of a transfer tax.” This manner of proceeding can include recording a mortgage assignment, from the named mortgage holder, who might not be exempt, to Fannie Mae, which can be accomplished with a simple recorded instrument and a small recording fee.

The federal policy to continue to exempt these associations from state real estate transfer taxes, as embodied in unamended provisions in the federal statutes that established the associations, is at the expense of taxpayers in states in which the exemptions are claimed, as shown in the numerous federal court challenges described above. Fannie Mae reported $29.9 billion in net income in 2021, and Freddie Mac $22 billion the same year, to the benefit of their investors. While exemption from state taxes on foreclosure deeds cannot fairly be said to be a major contributor to this scale of profitability, the broad sweep of exemption that benefits these associations and their investors is striking when compared to the way other parties in foreclosure contexts must cope with the nuances of exemptions under state laws and regulations.

B. Real Estate Companies and Controlling Interests

Conveyance by a deed is not the only way that investors can transfer control over real estate ownership. In a modern transactional environment, real estate investors might use multiple legal entities to attract capital, disburse risk, and minimize transactional costs including taxes. The value in real estate can be held in the name of a corporation, limited liability company, partnership, or other business organization. Such an entity is commonly referred to as a “real estate company” if real estate ownership is its purpose. The value in assets can be transferred with sale of the stock or other ownership interests. This arrangement can be as simple as put-ting record title in the name of a limited liability company and transferring ownership interests in the company rather than conveying title to the real estate. State real estate transfer tax statutes also typically allow a tax-free transfer from one entity to another if ownership interests in the two entities are the same. In such circumstances, the law treats the recording of a deed as only a change in the owner’s name. The situation is different when the ownership interests in a company are being transferred to someone else, such as when a shareholder sells shares in a real estate holding company to a third-party purchaser.

Applying the real estate transfer tax to real estate ownership interest transfers is consistent with having a tax on transfer of the company’s asset by deed. Treating the two the same also avoids enabling sophisticated real estate investors to escape the tax through use of holding companies, while those who sell and buy homes in the typical way—by recording a deed—bear the burden of the tax. Sixteen states and the District of Columbia extend their real estate transfer tax to transfers of controlling interests. Liability for the tax is triggered when a controlling interest as defined in the jurisdiction’s tax laws is transferred, with the tax paid either to a register of deeds along with a recorded declaration, or to a tax agency with a tax return.

In any state with a controlling interest transfer tax, the determination of whether a tax is owed involves two analytical steps. The first step is determining whether a company that owns real estate is sufficiently engaged in the real estate business to be considered a real state holding company. The second step is determining whether sufficient control of that company, or another company that controls it through tiered ownership, has been acquired. The details in these two steps become the criteria on which investors focus if they wish to divide assets or ownership interests in a way to avoid the tax upon a transfer or restructuring of real estate assets or interests.

Each of the states with a controlling interest transfer tax approaches these steps differently, including the states on which this Article focuses as examples. The North Carolina statutes have no provisions to capture such transfers, enabling real estate investors who wish to avoid the tax to use a company ownership structure. Both New Hampshire and Penn-sylvania impose the tax. Their statutes and regulatory interpretations illustrate significant differences in the reach of the tax and the incentives created for real estate investors.

New Hampshire has controlling interest transfer statutory provisions stated in general terms. The statute defines a “real estate holding company” as a business organization that “is engaged principally in [the business of] owning, holding, selling, or leasing real estate and which owns real estate or an interest in real estate within the state.” Under the New Hampshire statute, transfers of an interest in a parent company are also considered taxable transfers “to the extent of the ownership interest of the entity in the real estate holding company.” The real estate transfer tax applies “to the extent of the fair market value of the real estate.” To illustrate application of the tax to transfers of interests in real estate holding companies, the state Department of Revenue Administration rules describe a situation in which real estate is owned fifty percent each by two separate limited liability companies, and a transfer occurs in which one of the companies conveys its fifty percent interest to another company. The tax, according to the department, is based on fifty percent of the value of the real estate being transferred.

Pennsylvania’s statutes and regulations are less inclusive about what is deemed to be an acquisition of a real estate holding company but more detailed in defining when the tax is triggered and in how the rules apply to complex ownership structures. The Pennsylvania controlling interest transfer tax statutes define a “real estate company” as a company “primarily engaged” in a real estate business provided ninety percent of its ownership interests are held by thirty-five or fewer owners, and one of three thresholds is met. One threshold is deriving sixty percent or more of gross annual receipts from the real estate business. A second is having real estate as ninety percent or more of the company’s assets. The third is being a corporation or association the assets of which are ninety percent or more direct or indirect ownership in a real estate company—even if the corporation or association owns no real estate itself. The tax is imposed when ninety percent or more of the interests in such a real estate company is transferred within three years. A binding commitment or option granted within the three-year period counts as a transfer. The amount of the tax is based on the cumulative value of what is acquired through commonly owned companies. For example, if two limited liability companies with the same parent company each acquire fifty percent of another limited liability company, which has only real estate as its assets, the tax would be due on the full value of the real estate. A company that acquires only a cumulative ninety percent interest in a company owning real estate pays a tax based on ninety percent of the real estate’s value.

Pennsylvania’s multi-level control percentages and three-year capture period narrow but do not eliminate opportunities for careful real estate investors to arrange for transfer-tax-free indirect transfers, which naturally is an important consideration for highly valued properties that might be subject to a large tax obligation. For example, some investors might use an “89-11” arrangement, by which eighty-nine percent of a partnership or other business organization is transferred at one time, and transfer of the remaining eleven percent is postponed until three years and a day later. Investors can also use multi-layered ownership structures in which a common set of investors owns significant shares in vertically related corporations, allowing the transfer of shares at various levels in the ownership hierarchy without crossing the ninety percent threshold on a single level. The state Department of Revenue instructs that, to determine if a real estate company has been acquired, “[t]he Department only looks to direct changes in ownership of the real estate company itself.” With this approach, when a company acquires a percentage ownership of both a real estate company and a percentage ownership of a parent company, the state does not combine ownership percentages to determine if an acquisition has occurred.

Philadelphia, which imposes its own local controlling interest tax, is even more aggressive than its state in applying its real estate transfer tax to multi-tiered ownership structures. The Philadelphia Code defines acqui-sition of a real estate company as occurring when seventy-five percent of total ownership is transferred within six years. The Philadelphia Depart-ment of Revenue has issued guidance that it disagrees with the state’s approach about multi-level ownership, instead taking the position that “transfers in separate tiers of tiered holding companies must be combined to determine if the transfers result in a 90% or more transfer of the real property interest and that the tax is due on the entire value of the real property held.” Understanding a circumstance in which this approach would result in a local city tax, but not a state tax, may require studying an interwoven company ownership structure, a level of sophistication likely to be of interest only to investors in highly valuable real estate organizations that are potentially subject to a substantial tax. No such planning possibilities are available to the common home seller and purchaser.

VI. Conclusion

After the federal government no longer found a real estate transfer tax to be worth the cost of enforcement, states had the opportunity to step in and collect revenue in a way to which real estate professionals had become accustomed. As might have been expected in the American federalist system, the states adopted myriad formulations. Some states chose not to have such a tax; others imposed a tax on a scale similar to the federal stamp tax; still others imposed taxes at a significantly higher rate than the federal government and with a farther reach.

As is generally the case with federalism, allowing for variation can enable local governments to make their own choices based on their particular circumstances about how their residents want to be governed, including about how they want to be taxed. With respect to a real estate transfer tax, appropriate considerations would include its effect on the prices of different types of real estate, and who truly bears the burden of payment. There is little evidence that this tax is the careful product of such considerations. The more likely explanation for the status of the tax in a jurisdiction is that it is a matter of political toleration for a legacy of its imposition. The likelihood of this explanation is bolstered by the real estate transactional community’s successes when opposing new real estate transfer taxes. In most places, however, real estate transfer taxes are inconspicuous enough to escape this kind of attention. As a result of these dynamics, the tax can be accurately described as mostly a happenstance, incongruous within a state’s tax system and among the states.