On July 12, Howard County reimbursed five taxpayers for $587,151.56 in connection with recordation taxes that they had paid under protest. This amount includes $499,112.50 for the amount of the taxes that the County forced the taxpayers to pay plus $88,039.06 in interest as required by Maryland law.

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Affirming the holding of the Maryland Tax Court, the Circuit Court for Howard County ruled this month that when the recordation tax becomes due on an indemnity mortgage or an indemnity deed of trust (an “IDOT”), the party responsible to pay the tax is the guarantor who executed the IDOT.

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Recent Maryland legislation will change the law affecting indemnity mortgages and indemnity deeds of trust (“IDOTs”) as well as refinancings in this state generally. Effective July 1, the new law raises the size of loan transactions involving IDOTs which are taxable when they are recorded from $1 million to $3 million, and it changes the way refinancings in Maryland are taxed.

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The basis of the indemnity deed of trust (“IDOT”) recordation tax exemption (or deferral for the purists) is that, under Tax Property Article 12-105(f), the recordation tax does not apply to a deed of trust that secures a debt not yet incurred. A guaranty, unlike the direct promise to pay in a promissory note, is considered a contingent obligation. So where a deed of trust secures the grantor’s guaranty of the debt of a third party, no debt is incurred by the grantor and therefore no recordation tax is due. However, once the guaranty becomes a primary obligation, such as when the borrower under the guarantied note defaults and the lender calls the guaranty, then the debt is incurred and the deed of trust becomes subject to the recordation tax.

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Maryland jurisdictions cannot require that lenders and purchasers of foreclosed properties pay the recordation taxes on guarantor-backed deeds of trust, the state’s administrative Tax Court has ruled.

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