By Jefferson H. Weaver, Esq.
Documentary Stamps Due On Sale
Buyers and sellers of real estate in Florida have some familiarity with the documentary stamp tax as it invariably shows up on their settlement statements as a closing cost. Whether the seller alone or both the seller and buyer pay documentary stamp taxes depends on the type of transaction. If there is no financing involved, then the documentary stamp tax will be calculated based upon the sales price of the property itself at a rate of $0.70 per $100 of value. The only county in Florida with a different schedule is free-thinking Miami Dade County where the rate is $0.60 per $100 of value when the property is a single family residence. Other types of properties in Miami Dade County are charged slightly different rates of documentary stamp tax.
Example: If I am selling my house in Broward County for $1,000,000, I will typically be the one who pays the documentary stamp tax of $7,000 due at closing. The party responsible for payment of the documentary stamp tax on a sale is usually determined by the terms of the purchase agreement. However, because the seller is required to provide marketable title to the property, the seller usually pays these taxes. One could always try to convince the buyer to pay such a tax but most buyers are not so charitably inclined and will complain loudly about the seller’s parasitic character. The actual tax must be paid to the clerk of the circuit court or similar authority in the county in which the real property itself is located before the deed can be recorded.
Documentary Stamps Due On Financing
Buyers of real estate are not necessarily out of the woods in avoiding the imposition of documentary stamp taxes because they may need to finance the purchase of their property. The state legislature, which is always keen to scrounge up a few dollars for the state coffers, imposes a documentary stamp tax on the face value of any promissory note given for the purchase of real property. The amount of this tax is equal to $0.35 per $100 of the face value of the promissory note.
Example: If the buyer of our $1,000,000 property has borrowed $700,000 from a bank to finance the purchase, then the buyer will be responsible for the payment of a documentary stamp tax in the amount of $2,450 at closing. As with the documentary stamps on the deed, the party responsible for the payment of the tax is spelled out in the purchase agreement but the custom as to who pays which taxes seldom diverges from what we have described.
And Then There Is the Intangible Tax
The Florida legislature decided that they needed to add an extra tax on the mortgage that secures the promissory note being given by the buyer to his lender. The so-called “intangible tax”, which is calculated at a rate of $0.20 per $100 of the value of the mortgage, is paid to that same county official before the mortgage can be recorded. Those who are tempted to skimp on paying the intangible tax and not record the mortgage should realize that lenders routinely oppose such plans because it prevents the obligation contained in the note from being collateralized by the underlying property. The recorded mortgage gives the world notice that the lender has certain rights to the repayment of the loan which, subject to a few exceptions, are paramount if the lender needs to foreclose on the property to recover the loan proceeds.
Exceptions to the Documentary Tax
The Florida Statutes do provide certain exceptions to the documentary stamp tax. Government entities (e.g., government agencies, municipalities, and political subdivisions), not surprisingly, are exempt from documentary stamp tax. Private individuals, for the most part, do not enjoy such exemptions.
Minimizing the Documentary Stamp Taxes By Severance of Personal and Real Property
The buyer and seller may revise their purchase agreement to enable the seller to save some of the documentary stamp tax that would otherwise be due on the deed at closing. Whether the buyer goes along, however, depends on whether the buyer determines such an approach to be beneficial, given his or her circumstances.
If I determine that there is $100,000 worth of personal property in my house that will be part of the sale such as furniture, window treatments or my collection of deer head chandeliers, then the Seller may want to revise the purchase agreement to state that the sales price of the house is $900,000. However, the sale of the house is contingent upon the buyer also paying $100,000 for the personal property that will be included in the sale. In short, the total sale price is still $1,000,000, but I will have reduced the documentary stamps that I will have to pay on the deed from $7,000 to $6,300 because I am reducing the price of the real property by 10%. The buyer may find this to be an attractive proposal because his basis in the property will be reduced by 10% and he should be able to expect a corresponding reduction in his property taxes when he gets the bill. However, the reduction in the stated value of the real estate may cause the buyer’s lender to reduce the amount of the loan if the lender believes that a $700,000 loan creates too much debt on a property with a stated value of $900,000. The buyer will also have to consider that the reduced basis may mean a higher capital gain when he sells the house.
The Department of Revenue is always keen to squash anyone wishing to trifle with their tax revenues so there is the possibility (however remote) that they would contest the stated value of the personal property and try to charge the $700 in saved tax plus any penalties and interest. To protect the Seller, the Seller should secure a written appraisal of the personal property included in the sale stating that the personal property is worth at least $100,000. This does not guarantee that the Department of Revenue will leave the Seller alone, but it gives the Seller a credible defense if he or she needs to respond to an audit. Whether the savings in documentary stamp tax is worth the cost of the appraisal is another question to be evaluated.
About the Author: Jefferson H. Weaver is an attorney in Fort Lauderdale, Florida, whose practice is concentrated in the areas of commercial and residential real estate and corporate law. He can be reached at (954) 489-4719 or weaverlawfirm@gmail.com.
Special Note
The information on this blog is of a general nature and is not intended to answer any individual’s legal questions. Do not rely on information presented herein to address your individual legal concerns. If you have a legal question about your individual facts and circumstances, you should consult an experienced real estate attorney. Your receipt of information from this website or blog does not create an attorney-client relationship and the legal privileges inherent therein.