The real estate industry is up in arms about an Anne Arundel County decision to collect taxes on certain types of home sales based not on what the buyers paid, but on what the sellers owed on their mortgages as the deal was struck.

What's at issue are short sales, which are homes that change hands for less - sometimes far less - than the balance due on the loans. The county policy may be unique in the country, according to the American Land Title Association, which represents companies involved with home sale settlements.

"Buyers and sellers are already being squeezed, and this is just an extra tax that nobody saw coming and nobody is prepared to pay," said Charles Kasky, vice president of legal affairs at the state Realtors association. "It can be thousands of dollars additional in the transaction."

Anne Arundel County said it is charging its recordation tax of $3.50 for every $500 on the sales price plus any forgiven debt. If the lender has indicated that it will go after the seller for the remainder owed, then the county will tax just the contract price, as it does with regular home sales. Richard Drain, the Anne Arundel County controller, said it isn't a new policy and the county is simply following state law.

But the Maryland Association of Realtors said the county began requiring the extra money last week without warning, putting some settled deals in limbo as title companies and agents scrambled to figure out how much was owed and who would be paying. Taxes collected on home sales are typically split between buyers and sellers.

Drain said the county's attorneys agreed last week that forgiven short-sale debt is taxable.

The Maryland Judiciary, which oversees the state's courts, said Wednesday that the Anne Arundel County Circuit Court, which collects the taxes on home sales, is also taxing forgiven debt "using state guidelines." The recordation and transfer taxes add up to $1,100 on $50,000 of forgiven debt.

"We're not trying to be onerous on folks," Drain said. "The point is, the law is the law, and we have to follow it."

But other counties aren't collecting transfer and recordation taxes on forgiven debt, the Maryland Association of Realtors said. Montgomery County was considering it recently but decided to wait on legal advice and "further clarification," said Patrick Lacefield, a county spokesman.

The Maryland attorney general's office said it is researching the issue and expects to weigh in.

Short sales might seem like a potential revenue source to budget-battered local governments because they have become increasingly common in recent years. Since the region's multiple-listing service began tracking "potential" short sales last April, 12 percent of home sales or homes under contract in Anne Arundel County have fit into that category, said Pat Savani, a regional manager with Champion Realty in Annapolis. Before the housing market soured, industry observers say, short sales were virtually unheard of.

"I understand that everyone's revenue-strapped - get in line," Savani said. "It's unfair that they're picking on people who are financially insolvent."

A complicating factor is that it is often unclear at the settlement table what lenders will do about unpaid debt. They frequently don't issue the sort of documentation the county wants as proof that they will seek repayment from the borrower - a promissory note, for instance - but also don't formally let the borrower off the hook.

"They say, 'I'll allow the sale to occur,' but they reserve the right to chase the seller for the deficiency," said Andrew Levy, executive vice president and general counsel for Capitol Title Insurance Agency in Crofton.

Drain said the county would accept taxes on the fair market value instead, but only if the parties provide proof, such as a recent appraisal, along with a hardship letter from the seller to show financial difficulty.

Mike Davis, an associate broker with Champion Realty in Annapolis, thinks the hardship letter requirement is a violation of a seller's privacy. He said he has a sale that hasn't been recorded because the county is requiring the letter. The county also required $1,210 more in taxes than expected, based on the fair-market value calculation.

Short sales often change hands for less than regular sales, he said. That's because it's so difficult to see them through to closing, and buyers can't be certain they'll get to the settlement table. He said the county's tax policy won't help matters.

"They think they're going to collect more money, but what's going to happen is ... deals are going to die that should have been closed," he said.

An earlier version of this story implied that a higher-than-expected tax bill was preventing the recording of a home sale handled by Mike Davis of Champion Realty. Rather, the hold-up is a county requirement to produce a hardship letter. The Baltimore Sun regrets the error.