April 26, 2023
Re: § 58.1-1821 Application: Recordation Tax
Dear *****:
This will reply to your letter in which you request a refund of state and local recordation taxes paid by ***** (the “Taxpayer”) for recording a deed of trust.
FACTS
An individual acquired four condominium units in ***** (the “County”) between 2000 and 2004 by four separate deeds. Each unit was encumbered by a different deed of trust with different lenders. The four units were transferred to the Taxpayer, a limited liability company (LLC), by the individual in March 2022. The individual was the sole member of the Taxpayer.
The Taxpayer negotiated with a lender to issue a single loan secured by a deed of trust in order to pay off the four existing loans on the units. This new deed of trust provided that the lender had made a commercial mortgage loan to the Taxpayer to provide funds to refinance the four units.
The Taxpayer attempted to record the new deed of trust in the County at the rate allowed for deeds of trust for refinancing. The County disallowed the recording of the deed of trust at the refinancing rate because the Taxpayer was not the borrower on the original deeds of trust. At the County’s request, the Taxpayer removed a refinancing notation from the deed of trust and paid the recording tax at the standard rate. The Taxpayer appealed, contending that the deed of trust it recorded with the County was for a refinancing and that it should have paid recording tax at the refinancing rate.
DETERMINATION
Virginia Code § 58.1-803 A imposes the recordation tax on deeds of trust or mortgages “at a rate of 25 cents on every $100 or portion thereof of the amount of bonds or other obligations secured thereby.” Virginia Code § 58.1-803 E 1, however, provides that recordation tax is paid on refinanced deeds of trust or mortgages according to a schedule that is at rates lower than those assessed pursuant to Virginia Code § 58.1-803 A. Specifically, Virginia Code § 58.1-803 E 1 provides that these special rates apply to “deeds of trust or mortgages, the purpose of which is to secure the refinancing of an existing debt, which debt is secured by a deed of trust or mortgage on which the tax imposed hereunder has been paid . . . .”
The Taxpayer contends that the deed of trust it recorded secured the refinancing of the four existing deeds of trust on the condominium units for which the recordation tax had been paid and that there is no statutory requirement for the borrowers on the original deeds of trust and the refinance deed of trust to be the same.
The Code does not define “refinance” or “refinancing” for purposes of the recordation tax. Absent a statutory definition, the plain and ordinary meaning of the term is controlling. See Samson v. Board of Supervisors, 257 Va. 589, 514 S.E.2d 345 (1999). “Refinance” is defined as “to pay off existing debts with funds secured from new debt; to extend the maturity date and/or increase the amount of an existing debt; to arrange for a new payment schedule” and “the discharge of an obligation with funds acquired through the creation of a new debt, or at a different interest rate.” Black’s Law Dictionary, Sixth Edition, p. 1281. In addition, Virginia Code § 55.1-319, which addresses the priority of a residential refinance over subordinate mortgages, defines “refinancing” as “the replacement of a loan secured by a prior mortgage with a new loan secured by a refinance mortgage and the payment in full of the debt owed under the original loan secured by the prior mortgage.” Neither definition requires that the borrowers on the refinancing mortgage be the same as the borrowers on the original mortgage. In addition, the plain language of Virginia Code § 58.1-803 does not necessarily require the borrowers to be the same.
In the Department’s opinion, the question of whether a deed of trust was to secure the refinancing of an existing debt must be determined with reference to all the facts and circumstances. In this case, an individual transferred the properties in question to the Taxpayer, an LLC of which he was the sole member. As described by the recital of facts that prefaced the deed of trust, the lender made a loan to the Taxpayer to provide funds to refinance the properties in question. Although the recitals themselves are not controlling, they are instructive in conveying the intent of the parties. The Department also observes that conveyances of property by individuals to entities they control, such as grantor trusts or single member LLCs, are not uncommon as estate planning techniques, or with a business purpose in mind, such as liability protection.
Virginia Code § 55.1-320 provides that “[e]very deed of trust . . . is in the nature of a contract and shall be construed according to its terms to the extent not in conflict with the requirements of law.” In this case, it is clear that the new loan was the responsibility of a business entity of which the original borrower had sole control and that the new loan proceeds were intended to pay off the borrower’s previous debt on the same properties that were now titled in the entity’s name. In addition, as stated above, the deed of trust clearly indicates it was the intent of the parties to refinance the exisiting debt.
Accordingly, the deed of trust recorded by the Taxpayer was for a refinancing and thus qualified for the rates provided by Virginia Code § 58.1-803 E. As such, the Department will refund the appropriate amount of the tax for recording the deed of trust. The Department will send a copy of this letter to the Clerk of the County and a refund of the local portion of the tax on the deed of trust will be issued by the County.
The Taxpayer and the County should be aware that this determination applies to the unique facts of this case, and the Department expresses no further opinion concerning what transactions may or may not qualify as a refinanced deed of trust or mortgage for recordation tax purposes.
The Code of Virginia sections 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 *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/4182.B