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Saturday, September 06, 2008


Florida imposes documentary stamp taxes on the transfer of real property, based on the amount paid for the property. Amounts paid for the property include mortgage indebtedness that encumbers the property.

The declines in real property values has given rise to a substantial increase in real property "short sales." These sales are purchases by third parties of distressed real property from the owners at a sales price less than the current mortgage indebtedness, with the lender typically forgiving the unpaid mortgage amount.

The question arises whether documentary stamp taxes should be computed on the full mortgage amount (before the forgiveness), or on the lower purchase price paid by the buyer. By analogizing to existing rules that impose documentary stamp taxes on the full indebtedness amount when a mortgage holder transfers encumbered real property back to the lender as a deed in lieu of foreclosure, the Florida Department of Revenue has informally advised that it believes documentary stamp taxes in a short sell should likewise be based on the full amount of the mortgage debt.

There are practical difficulties with using the full amount of the mortgage debt. For example, buyers may not be aware of the full amount of the debt when they buy, even though they are responsible for the documentary stamp taxes (along with the seller). Further, since sellers are usually responsible by contract for payment, imposing higher taxes only increases the financial burden and distress of the home seller.

It is expected that the Department of Revenue will be issuing guidance to taxpayers within the next two weeks. If the Department indicates that the higher tax amounts are due, there is a possibility that the Legislature could try to reverse it through legislation, at least in regard to situations involving insolvent sellers.

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