Short sales, foreclosures and taxes … oh my!

In the light of the current residential real estate market, short sales and foreclosures in Florida are becoming more commonplace. As with standard real estate transactions, taxes play a large part in the closing process when it comes to short sales and foreclosures.

In Florida the closing agent is responsible for calculating the documentary stamp tax, intangible tax and other real estate taxes depending on the transaction.

For the standard residential closing this usually means documentary stamp tax on the deed, documentary stamp tax on the mortgage (if there is one), intangible tax on the note and proration of the annual ad valorem taxes.

Needless to say, real estate closings in Florida are not always simple. Add a short sale or foreclosure into the mix, and a real estate closing becomes that much trickier.

Real estate taxes and short sales

Short sales are now very common and occur when a distressed seller is in default on his mortgage, and the home’s market value has declined to such an extent that the purchase price of the property is less than the remaining balance on the existing mortgage.

Since these properties are often purchased at a deep discount, Florida title agents have questioned what value to base their tax calculations upon – the value of the purchase price plus the amount of the loan forgiven or the original price of the home.

After careful consideration the Department of Revenue stated that in arm’s length transactions, documentary stamps are only due on the purchase price rather than the purchase price plus the amount of dept forgiven.

See Florida Statute Sec. 201.02.

Real estate taxes and foreclosures

Florida foreclosures are handled in a similar matter. If a lender decides to foreclose against a mortgagor and the successful bidder of the Florida property receives a certificate of title after a proper foreclosure and sale, then the documentary stamp tax is due on the certificate of title and is computed on the successful bid at the foreclosure sale.

The same is true is a sheriff’s deed is executed pursuant to a sheriff’s sale.

However, if a bank agrees to accept a deed in lieu of foreclosure, then the documentary stamp tax is calculated based on the remaining balance of the mortgage plus any accrued unpaid interest. This can quickly amount to a very high number considering most default interest rates on loans of $500,000 or more are approximately 24%.