The legal history, incongruous variations, and outer reaches of the real estate transfer tax

• Pages: 275-321
• Date: 01 October 2022
• Author: Charles Szypszak
• Subject Matter: Derecho Público y Administrativo

THE LEGAL HISTORY, INCONGRUOUS

VARIATIONS, AND OUTER REACHES OF THE

REAL ESTATE TRANSFER TAX

Charles Szypszak*

Author’s Synopsis: Real estate transfer taxes have been around a long

time, but they receive scarcely any attention in public discussions about

tax law and policy. While real estate practition ers may be familiar with

a transfer tax in their work, they and their clients may not know how

much it can vary in other states or consider how the variations can affect

real estate prices and investment. Although real estate transfer taxes are

a relatively small contributor to state tax revenues, they can be finan-

cially weighty to those buying or selling real estate, amounting to several

thousand dollars or more.

This Article provides background about the evolution of the real

estate transfer tax, from a colonial stamp tax to a widely varying state

tax. Some states’ constitutions forbid it; some states aim a tax at common

real estate transactions; other states impose a tax at a relatively high

rate and extend it even to complex transfers of interests in real estate

holding companies. This Article examines the legal basis for the tax,

describes its formulations, and analyzes the dynamics of its impact. The

analysis includes consideration of two significant issues about the outer

reaches of state transfer taxes: their application to foreclosures,

including when there are claims of federal exemption, and when there is

a transfer of control without a conveyance by deed.

∗ Charles Szypszak, Albert Coates Distinguished Professor of Public Law and

Government, School of Government, University of North Carolina at Chapel Hill. The

author is advisor to North Carolina’s registers of deeds and other public officials on real

estate law. Prior to joining the faculty in 2005, for nineteen years the author practiced real

estate and business law at a firm in New Hampshire.

276 57 REAL PROPERTY, TRUST AND ESTATE LAW JOURNAL

I. INTRODUCTION.......................................................................... 276

II. THE STAMP TAX LEGACY ........................................................ 277

III. THE DYNAMICS OF A REAL ESTATE TRANSFER TAX ............. 286

IV. STATE TRANSFER TAX VARIATIONS ........................................ 294

A. Basic Application and Rates ............................................ 294

B. Exemption Variations for Common Transfers ................. 299

V. CHALLENGES AT THE OUTER REACHES OF A REAL ESTATE

TRANSFER TAX .......................................................................... 307

A. Foreclosure and Mortgage Association Immunity ........... 308

B. Real Estate Companies and Controlling Interests ............ 316

VI. CONCLUSION ............................................................................. 321

I. INTRODUCTION

Real estate transfer taxes receive scarcely any national attention in

public discussions about tax law and policy. Although mostly inconspic-

uous since American colonists opposed a British stamp tax in 1765, a real

estate transfer tax has long been used in the United States for revenue

collection.1 It has evolved from a simple federal charge for a document

stamp to a tax that varies widely across the country. Some states’ constitu-

tions forbid it; some states aim a tax at common real estate transactions;

other states impose a tax at a relatively high rate and extend it even to

complex transfers of controlling interests in real estate holding companies.

Although it is a relatively small contributor to state tax revenues, it can be

financially weighty to those buying or selling real estate, amounting to

several thousand dollars or more, and research shows it can have a

significant impact on prices.2 Despite the many different ways a transfer

tax can affect real estate purchases and investment, there is no reason to

conclude that state policy and law makers carefully analyze transactional

realities in a way that makes the tax well-considered.

Part I of this Article provides background about the evolution of the

real estate transfer tax, from a colonial stamp tax to a widely varying state

tax on transfers of real estate interests. Part II analyzes the dynamics of the

tax, including its impact on real estate transactions. Part III describes the

basic nature of state versions of the tax and exemptions from it, with

examples from states with very different approaches. Part IV anal yzes two

significant issues about the outer reaches of state real estate transfer taxes:

1 See discussion infra Part I.

2 See infra notes 92–114 and accompanying text.

FALL/WINTER 2022 Real Estate Transfer Tax 277

their application to foreclosures, including when there are claims of federal

exemption, and their application to the transfer of controlling interests in

a company owning real estate when there is no conveyance by deed. In its

entirety, this Article illuminates a tax that too easily escapes the attention

that state and local policy makers should pay to it.

II. THE STAM P TAX LEGACY

Excise taxes levied on the sale or consumption of products are an

integral part of tax systems in market economies.3 Some scholars argue

that excise taxes are better than income taxes because, among other things,

they can encourage saving and target those of better financial means who

spend on luxuries.4 Excise taxes can also be a policy tool for discouraging

activities deemed harmful, as has been the case with efforts to control

consumption of liquor, tobacco, and gasoline.5

Governments have long looked to an excise tax on deeds and other

legal instruments as a public revenue source, including lawmakers in the

American Colonies.6 Legislation imposing such a tax was once known as

a “stamp act” because it required affixation of a stamp to a document as

evidence of payment.7 Years before movement toward independence, the

Massachusetts Bay Colony adopted such a tax in 1755, to be effective for

two years, at 4 pence8 for a deed when the consideration for the transfer

was 20 pounds or more (0.08% at 20 pounds consideration), and 2 pence

when the consideration was less than 20 pounds.9 Just a few months later,

3 See Joseph Bankman, The Superiority of an Ideal Consumption Tax Over an Ideal

Income Tax, 58 STAN. L. REV. 1413 (2006).

4 E.g., id.; Barbara H. Fried, Fairness and the Consumption Tax, 44 STAN. L. REV.

961 (1992); Alvin Warren, Would a Consumption Tax be Fairer than an Income Tax?, 89

YALE L.J. 1081 (1980).

5 See, e.g., Jendi B. Reiter, Citizens or Sinners? – The Economic and Political Inequity

of “Sin Taxes” on Tobacco and Alcohol Products, 29 COLUM. J.L. & SOC. PROBS. 443, 443

(1996).

6 See, e.g., Ch. 18, 1754–1755 Province Laws 2d. Sess., 793, 793, reprinted in THE

ACTS AND RESOLVES PUBLIC AND PRIVATE OF THE MASS BAY 793 (1878),

https://archive.org/details/actsresolvespass1878mass/page/n3/mode/2up [hereinafter THE

ACTS AND RESOLVES].

7 See id. at 794.

8 There were 240 pence to the pound in the old English coinage system.

9 See An Act for Granting His Majesty Several Duties upon Vellum, Parchment and

Paper, for Two Years, Toward Defraying the Charges of This Government, MASS. BAY

PROVINCE L. ch. 18, § 1 (1755), in T HE ACTS AND RESOLVES, PUBLIC AND PRIVATE OF THE

MASS. BAY 793–76 (1878).