Tax Type
Recordation Tax
Description
Leasehold interests; Recordation Tax
Topic
Local Taxes Discussion
Property Subject to Tax
Records/Returns/Payments
Taxable Transactions
Date Issued
03-24-2014
March 24, 2014
Re: § 58.1-1821 Application: Recordation Tax
Dear *****:
This will reply to your letter in which you request a refund of the state and local grantor taxes paid by ***** (the "Taxpayer") for recording a deed. I apologize for the delay in responding to your request.
FACTS
The Taxpayer owned property that was subject to leasehold interests held by another party (the "Tenant"). In the same transaction, the Taxpayer and Tenant sold their respective interests to a third party (the "Purchaser"). Both the lease assignments and the purchase agreement provided that the title to the property and the leasehold interests would not merge as a result of the sale. The deed also provided that the property was conveyed subject to the leasehold interests.
In March, 2013, the Taxpayer and the Tenant presented the assignments of their leasehold interests for recordation to the Clerk of the Circuit Court of ***** (the "County"). The Taxpayer also presented the deed for recordation. The County assessed grantor's tax against the deed based on the assessed value of the property, which did not account for the leasehold interests and which was greater than the consideration paid for the conveyance of the Taxpayer's interest.
Pursuant to a separate written agreement, the Taxpayer and Tenant each paid half of the tax assessed, and the Taxpayer filed a claim for refund on their behalf. The Taxpayer contends that the County should have based the grantor's tax on the consideration paid for the Taxpayer's interest, which was greater than the value of the property as indicated by an appraisal which accounted for the leasehold interests.
DETERMINATION
Leasehold Interests
Virginia Code § 58.1-802 imposes a grantor's tax of 50¢ on every $500 or fraction thereof, exclusive of any lien or encumbrance remaining thereon at the time of the sale, on the greater of the actual value of the property conveyed or the consideration of the sale. An encumbrance is "a claim or liability that is attached to property or some other right and that may lessen its value, such as a lien or mortgage; any property right that is not an ownership interest." Black's Law Dictionary 568 (8th ed. 2004). As a property right that is not an ownership interest, a leasehold interest is an encumbrance.
Generally, a lesser interest in property will be merged into a greater interest when they are held by the same person, at the same time, and in the same right and no intermediate interest exists. See Garland v. Pamplin, 73 Va. 305, 1879 WL 5410 (1879). The presumption that parties intended a merger, however, is rebuttable. See Venator Group Specialty, Inc. v. MLK Assocs. Ltd. P'ship, 56 Va. Cir. 41, 2001 WL 543418 (2001).
At closing, the Purchaser received the deed to the property and assignments of the leasehold interests. The purchase agreement and assignments, however, provided that the leasehold interests would not terminate or merge as a result of such common ownership. The deed also provided that the property was conveyed subject to the leasehold interests. Thus, under these conditions, the leasehold interests remained separate from the land at the time of sale. As such, the value of the leasehold interest would be excluded for purposes of determining the grantor's tax.
Valuation
The Taxpayer contends that the grantor's tax should have been based on the consideration received for its interest because it was greater than the value of the property as determined by an appraisal which accounted for the leasehold interests.
The assessed value of real estate is accorded a very strong presumption of accuracy in determining fair market value. See Shoosmith Bros., Inc. v. County of Chesterfield, 268 Va. 241, 601 S.E.2d 641 (2004) and Tidewater Psychiatric Institute, Inc. v. Virginia Beach, 256 Va. 136, 501 S.E.2d 761 (1998). A clerk of the circuit court is not required to use the assessed value to the exclusion of other reliable information as to the current fair market value. If it can be shown by clear and cogent evidence why the assessed value does not reflect fair market value as of the date of the transaction, the clerk has the authority to rely on such evidence to determine the proper amount of the recordation tax. See Public Document (P.D.) 00-97 (5/26/2000), P.D. 06-77 (8/23/2006), and P.D. 12-61 (4/27/2012).
Placing a value on real estate is entirely a factual determination that is best made by one who is thoroughly familiar with the property itself and local market conditions. This responsibility lies with the Clerk when the value must be determined for recordation tax purposes. See P.D. 91-146 (8/2/1991).
In this case, the assessed value did not account for the leasehold interests. As such, it did not accurately reflect the fair market value of the Taxpayer's interest at the time of the sale. The Department, therefore, will send a copy of this letter to the Clerk of the County and request that the actual value of the property be determined, exclusive of the value of the leasehold interests, taking into consideration the Taxpayer's appraisal and all other relevant and reliable information available. Pursuant to Va. Code § 58.1-802, the grantor's tax shall be based on the higher of the consideration or the value as so determined. When the County informs the Department of the correct fair market value, the Department will refund the appropriate amount of state recordation tax. A refund of the local recordation tax would be issued by the County.
The Code of Virginia section and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact *****in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5434158695.M
Rulings of the Tax Commissioner