By C. Lane Wood –
With the change of seasons and the coming of a new year, you may find yourself doing a little life planning, whether for business or personal reasons. However, if your planning contemplates the transfer of an interest in real property, don’t forget to consider Florida’s documentary stamp tax.
The Basics:
Documentary stamp tax (commonly referred to as “doc stamps”) is the tax levied by the State of Florida on various types of documents passed within the state, such as deeds, bonds, promissory notes and mortgages. The applicable rate depends upon the type of document, but with respect to deeds, easements and other instruments for the transfer of an interest in real property, documentary stamp tax is levied at a rate of $0.70 for every $100 of consideration associated with the transfer. This article will briefly outline some of the laws governing documentary stamp tax in order to help you better understand whether or when an instrument for the transfer of a real property interest is taxable.
Consideration:
The first question of taxability is obviously whether or how much consideration is given in connection with the transfer. This issue is not quite as intuitive as it may seem, so an understanding of what constitutes consideration or a taxable transfer is the best place to begin.
Cash is King. Consideration in its most common form is the money paid for the particular property interest being transferred. For example, if you sell your home and deed it to the buyer for $350,000, the documentary stamp tax due on the deed from you to the buyer would be $2,450 ($.70 for every $100 of $350,000). That seems fairly straight forward, and it is. However, some people go on to assume that by avoiding the exchange of money, they can also avoid the added expense of documentary stamp tax. That is not correct under the law. Chapter 201, Florida Statutes (the law imposing documentary stamp tax), defines consideration much more broadly than the exchange of money.
Discharge of an Obligation. The transfer of an interest in real property in exchange for the discharge of a debt, contract or other obligation on your behalf constitutes consideration requiring the payment of doc stamps on the associated transfer document. The tax applies to the amount or value of the obligation discharged on your behalf. This is important because many properties are subject to mortgages.
Outstanding Mortgage Indebtedness or Liens on the Property. Based on the concept above, if the property being transferred is encumbered by a mortgage or other lien and you covey the property to someone else, even if the transfer is truly a gift with no additional consideration involved, the law looks at the underlying mortgage or lien as consideration. This is true regardless of whether the underlying mortgage or lien is affirmatively assumed by the recipient of the encumbered property interest. Essentially, the law presumes that you will not be paying the remaining amount due under the mortgage or lien, and that the recipient will, so the outstanding mortgage balance is treated as if the recipient had paid you that amount for the property, which would have obviously required the payment of tax had the sum been paid to you in cash. The good news, however, is that, absent any additional consideration given in connection with the transfer, tax applies only to the outstanding balance of the mortgage or lien at the time of conveyance (not the original amount of the mortgage or lien). If additional consideration is given, documentary stamp tax would apply to the additional cash or other consideration received in exchange for the property (i.e., if, in the example above, the home being sold for $350,000 is subject to a $200,000 mortgage and the buyer makes a payment of $150,000 cash to the seller, the documentary stamp tax on the deed would still be $2,450 based on the full sales price).
Property Received Other Than Money. What if there are no dollar figures involved? Say you want to sell your vacation home to your friend, and to make things easier you agree to do a straight-up trade for his luxury boat that you’ve had your eye on. According to Florida law, property received in exchange for property is consideration, the amount of which is based upon the fair market value of the property received. So, in this example, the fair market value of the boat would need to be determined to know the amount of consideration for purposes of calculation of applicable doc stamps on the deed of the vacation home to your friend (note: sales tax may also apply since the boat is not real property, but that’s beyond the scope of this article).
Exceptions:
As you can see, it is fairly safe to say that, as a general rule, if you are transferring real property and receive something of monetary value in return, documentary stamp tax applies. However, there are some non-taxable transfers under law, either because no consideration is exchanged or the state deems the transfer to be an exception to taxation. A few exceptions are discussed below.
Foreign Property. Stamp tax applies to transferring an interest in Florida real property. A Florida resident who transfers an interest in out-of-state property, even if to another Florida resident, will not pay doc stamps on the transfer of the foreign property (note: it is important to verify whether a foreign jurisdiction has its own similar tax on transfers).
Unencumbered Real Property as a Gift. These transfers frequently occur within the family or in a charitable setting. If the property is not encumbered by any liens or mortgages, and if the transfer is made for no consideration whatsoever (be it money, property, discharge of indebtedness, etc.), then, generally speaking, the transferring document will not require doc stamps.
Leases of Real Property. Although a tenant pays rent throughout the course of the lease, at signing, the only consideration is the tenant’s promise that he or she will pay rent in the future. Thus, this type of “executory consideration” is deemed insufficient to merit documentary stamp tax. Again, please note that other state and/or federal taxes may apply relative to the lease payments themselves, but that, too, is beyond the scope of this article.
Transfer Due to Divorce. If a former spouse transfers his or her interest in the marital home to his or her former spouse, pursuant to a final order and/or settlement adopted by the court, no documentary stamp tax will apply on the transfer. If the couple is in the process of divorce and the interest is transferred prior to the final divorce decree, documentary stamp tax is required, but a refund can be obtained from the Florida Department of Revenue within one (1) year of the subsequent issuance of the final decree.
Revocable Trusts. A deed from the grantor of a revocable trust to the trustee of the trust is not subject to documentary stamp tax, nor is a deed from the trustee to the grantor to revoke the trust. This is true even if the property is subject to a mortgage because the obligor does not change. This is one of the few exceptions to the basic rule treating mortgage indebtedness as consideration.
Testamentary Deeds. Deeds executed by the personal representative of an estate in accordance with the terms of the testator’s will are not subject to documentary stamp tax.
As you can imagine, and as alluded to above, there are a number of situations that can arise in which Florida’s documentary stamp tax applies. It is strongly recommended that, prior to making any transfer of real property, you speak with a Florida licensed attorney who can advise you on what to expect in connection with your proposed transfers. Attorney C. Lane Wood is a licensed attorney certified by the Florida Bar as an expert in Real Estate Law.
As a Board Certified Specialist in Real Estate Law, Mr. Wood handles all facets of residential and commercial real estate development and finance. He has practiced law in Naples for over 15 years and carries an “AV” “Preeminent” rating from LexisNexis and Martindale-Hubbell. He has also been listed in Florida Best Lawyers. Whether your legal matter involves a routine purchase and sale or refinance transaction, a sophisticated multi-state or multi-party commercial contract, or perhaps the development of a small or large scale residential or commercial planned unit project, Mr. Wood has the skill set and experience necessary to advise you properly every step of the way. He believes an informed decision will always be the right decision, and as a former corporate management executive as well as a small business entrepreneur, he is equipped to blend sound legal advice with practical application to your business.
Salvatori, Wood, Buckel,
Carmichael & Lottes
239.552.4100
www.swbcl.com