The DC Office of Tax and Revenue (OTR) has received substantial press recently about whether they should have been collecting recordation taxes on the entire principal or just the “new” excess principal when an existing real estate loan was refinanced. This technical issue in the law has caused much concern in the DC real estate market and spurred the DC government to pass legislation clarifying that the tax only applied to the excess loan amount.
More recently, OTR issued Notice 2012-06 (the “Notice”) clarifying and superseding prior guidance regarding the recordation tax treatment of refinanced and modified security instruments. The Notice clarifies that effective for security instruments recorded after June 19, 2012, the legislation imposes a recordation tax on:
(i) a refinanced security interest equal to the excess of the principal amount of the refinance instrument over the principal balance due on the existing debt under the prior security instrument; and
(ii) a modified, amended or restated security instrument equal to the excess of the principal amount of the modified instrument (including amounts paid to the borrower on the existing security instrument during the preceding 12 months) over the principal balance on the existing debt (without including such payments).
This approach represents a departure from the prior guidance which assessed the recordation tax on the amount equal to the difference between the principal amount of the refinanced or modified instrument and the outstanding principal amount of existing debt under the prior security interest instrument. The Notice also provides details about what documentation a taxpayer must provide in order to substantiate the amount of tax due, which includes the amount of tax previously paid or any exemptions.