Schaefer takes aim at loophole in transfer tax Property owners have avoided a tax.


Property owners have avoided paying millions of dollars in real estate transfer taxes over the last several years -- involving properties as well known as Freestate Raceway and Severna Park Mall -- by exploiting the state law on corporate dealing.

Scrounging for revenue from any available source, the Schaefer administration has introduced a bill in the legislature to close the loophole.

In a typical case in 1989, a group headed by the late Frank J. De Francis sold the 107-acre Freestate Raceway in Laurel to the Cafritz Group, a major Washington development firm, for an estimated $8.3 million.

The transaction was accomplished not with a typical deed transfer but through a change of control of the limited partnership that holds title to the track. As such, the deal was not subject to the state and Howard County transfer taxes. They would have amounted to $124,500.

Many commercial properties -- particularly apartment buildings, hotels and office buildings -- routinely change hands untaxed through transfers of partnership control. State assessment officials have estimated that the loophole costs the state and counties at least $8.3 million a year.

"From a point of view of equity, these transactions are effectively selling the property and ought to be subject to the tax," said Ronald W. Wineholt, associate director of the state Department of Assessments and Taxation.

"If a homeowner pays the transfer and recordation tax on his $100,000 house, a person who buys a $10 million building downtown ought to pay it on that."

No one knows how many property transfers have escaped taxation this way. The transactions are relatively private and often buried behind a flurry of partnership filings that give no indication of the real estate involved. Assessment officials often find out only after they receive a change of address notice from a property owner. Other transactions come to light only through newspaper articles, officials said.

According to a list compiled by the Department of Assessments and Taxation, properties sold in the last eight years with no transfer tax paid include the Springhill Lake Apartments in Prince George's County, worth about $78 million; Whiskey Bottom Apartments in Laurel, worth $36 million; Severna Park Mall, worth $17 million; and Jumpers Hole Mall, worth $10.4 million.

The old News American building, with an assessed value of about $16.3 million, was transferred in late 1989 from the Hearst Corp. to a partnership that intends to develop the site. No transfer tax was paid, according to court records. It is not clear whether the transaction would be covered by the bill being considered in Annapolis because the Hearst Corp. has held on to an interest in the property.

The state transfer tax is 1/2 percent of the value of the property. Nine counties charge an additional local transfer tax, ranging from 1/2 percent to 6 percent.

Some partnership transactions also avoid the local recordation tax, which ranges from $1.65 to $3.50 per each $500 of the property's value.

The administration bill would make the transfer tax apply to transactions in which at least 80 percent of the property-owning partnership changes hands. The bill would only affect transfers of property worth at least $500,000.

Del. James C. Rosapepe, D-Prince George's, chairman of a House Ways and Means subcommittee considering the bill, said it is "outrageous" that corporations can avoid the transfer tax while homeowners are forced to pay it.

"I think it is typical for major shopping centers and office buildings to be sold in a form to avoid paying the transfer tax," he said. "It doesn't happen in every case, but it's typical."

The Maryland Bar Association, developers, apartment owners, and the Maryland Chamber of Commerce are fighting the bill, saying it would jack up the price of housing and hurt business growth.

"All we're saying is if you're going to collect the property tax each time the controlling interest in the property is transferred, you're going to increase the base cost of that land for the end user," said J. William Pitcher, a lobbyist for the Maryland Builders Association.

Opponents of the bill have argued that the state would collect little revenue because property owners would have to voluntarily report the transactions and pay the tax.

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