Anne Arundel County has a long history of capping property taxes, a policy that has kept its rate among the lowest in the Baltimore area but which has forced a generation of county executives to look for creative ways to bolster tax revenue.
That history may have something to do with the county's decision to apply its recordation tax far more broadly than any other jurisdiction in the state -- and perhaps even in the country. It is a policy that penalizes short selling, the sale of real estate at below mortgage value, an increasingly common event as owners and lenders alike seek to avoid foreclosure proceedings.
Recordation tax is normally applied to the contract price of a home at the time of a property sale. In Anne Arundel, it is $3.50 for every $500 of sale price. But the state law that covers recordation tax says it should be applied to any "consideration" given for the deed. In a short sale, does that consideration include the debt forgiven the seller by his or her lender?
Apparently unique in the state, Anne Arundel County has decided that yes, it does. So when a house with a $125,000 mortgage is sold for $100,000 (thanks to a bank's willingness to forgive the remaining $25,000 balance on the mortgage), county officials decided the recordation tax should be applied to the full $125,000.
That has the real estate industry up in the arms, as well it should. The Maryland Attorney General's office is now researching the law and is expected to offer an opinion on the matter later this week.
No matter what emerges from the desk of the attorney general, however, county officials clearly acted hastily. With state law in doubt, the matter should have been brought to the attorney general's office before the tax was so broadly applied -- or at least with sufficient warning to the real estate industry so that legitimate questions could be raised.
Surely, it was not too difficult for Anne Arundel officials to observe that no other Maryland county shares its legal interpretation. Montgomery County considered doing so but has chosen not to -- at least for the time being, according to a county spokesman. Maryland's real estate transfer tax is calculated similarly in Anne Arundel County but not elsewhere in the state -- most likely the result of local circuit court clerks simply following the county's lead.
Anne Arundel County Controller Richard Drain defends the practice as a long-standing interpretation of state law and notes that it only recently raised a fuss within the real estate community because of the volume of short-sales. Perhaps it was applied prior to this month, but if so, nobody in the industry seems to have noticed.
In any event, squeezing extra tax dollars out of a short-sale when the seller is presumably in desperate financial straits seems unwise as a matter of policy. It's also not so easy to calculate how much debt is being forgiven, a point even county officials concede.
Still, if the county is proven correct in its interpretation of the law, the legislature ought to amend the statute to end the practice immediately. A bank's loss need not be the county's gain.