Great news! The Office of Tax & Revenue issued an advisory regarding the recently enacted legislation to lower the recordation tax rate
payable on residential properties (including cooperative units) acquired by first-time District homebuyers to .725%. This rate reduction will apply to deeds recorded on or after October 1, 2017.
This notice is intended to provide general information concerning the reduced tax rate, as well as the procedures for establishing entitlement to the reduced rate.
In general, the recordation tax rate otherwise imposed on the purchase of eligible property by a first-time District homebuyer will be reduced to .725%. “Eligible property” is defined as improved residential real property, including an economic interest in a cooperative unit, that qualifies for the homestead deduction and is purchased for no more than $625,000. The purchase price ceiling is subject to annual adjustment based on the Washington, D.C., Standard Metropolitan Statistical Area Consumer Price Index for Urban Wage Earners and Clerical Workers.
A “first-time District homebuyer” is defined as an individual purchaser who has never owned eligible property as the individual’s principal residence. The term also includes an individual who has divorced or separated and who, by a written settlement agreement or court order, did not obtain an ownership interest in a principal residence that had previously been jointly owned. In order for a deed to qualify for the reduced rate, each grantee named in the deed must be a first-time District homebuyer.
The income of the persons residing in the household, including all grantees named in the deed, cannot exceed 180% of the Area Median
Income (AMI) as provided by the U.S. Department of Housing and Urban Development (HUD) as a direct calculation without taking into account any adjustment. Household income figures will be provided by the Recorder of Deeds in the application form.
In order to qualify for the reduced rate of tax, the entire benefit of the reduced rate must be allocated to the first-time District homebuyer, as shown on the settlement statement or closing disclosure form. Accordingly, the benefit of the reduced tax cannot be shared with the transferor of the real property, who should be allocated the full amount of the transfer tax due on the sale of the property.
An application for the reduced rate must be made at the time the deed of title is offered for recordation. The reduced rate cannot be
applied for after the deed is recorded. To be eligible for the reduced rate, the purchaser must provide the following:
1. Proof that each grantee is a bona fide District resident. Proof of residence includes, but is not limited to, District voter
registration, filed District income tax returns, District vehicle registration, District driver’s license or District government-issued identification card. If a grantee is not a District resident when the deed is recorded, the grantee must state that he or she intends to become a District resident in the immediate future.
2. Proof of household income for all persons residing in the property and for all owners, whether they reside at the property or not. The law does not provide an exclusion for renters living at the property. Proof of income includes pay stubs, tax returns, benefit statements, or business income and loss statements.
3. Proof that the property is eligible property, including the settlement statement or closing disclosure statement showing the purchase price and that the full benefit of the reduced recordation tax rate was allocated to the first-time District homebuyer.
4. A copy of the homestead deduction application (Form FP100). This application must also be filed with the Homestead Unit so that it can
be processed and a determination made as to the property’s eligibility for the homestead deduction.
5. A divorced or separated individual who previously jointly owned a principal residence and who claims first-time District homebuyer status must provide a copy of the written settlement agreement or court order showing that the individual did not obtain an ownership interest in the residence.
6. Other documentation as requested by the Recorder of Deeds.
The reduced rate of tax applies only to deeds of title to improved residential property and economic interests in a cooperative unit that are otherwise eligible.
The reduced rate of tax only applies to property which qualifies for the homestead deduction. The homestead deduction is only applied to
one lot. Accordingly, the reduced rate of tax will not apply to any lots conveyed in addition to the homestead lot. The consideration must
be allocated between the homestead lot and all other lots for purposes of computing the tax. A purchase price allocation expressly agreed on by the buyer and seller in the sale documents will ordinarily be accepted by the Recorder of Deeds. If there is no express purchase price allocation, the allocation will be made by pro-rating the purchase price among the lots based on their current assessed value for real property tax purposes. This will apply to condominium units with parking spaces that are conveyed by deed as opposed to as a limited common element. More to follow on how this issue will be handled.
If the property fails to qualify for the homestead deduction, the reduced rate will not be available and any additional tax due under the generally applicable rules will be imposed.
The Recorder of Deeds of the District of Columbia will issue an application form for the reduced tax rate.
No claim for refund will be allowed due to the issuance after the recordation of a deed of an updated version of the application reflecting an increased purchase price or household income ceiling. Eligibility for the reduced tax rate will be determined only on the basis of the limits stated in the application form in effect when the deed is submitted for recordation.
Information provided courtesy of Craig Sacks of National Capital Title & Escrow in Washington, DC. National Capital Title & Escrow is a local leader in residential real estate settlement services and I encourage you to consider working them during your next DC, MD, or VA real estate sale. All information provided herein should be independently verified with the settlement attorney you are working with and the District of Columbia Office of Tax and Revenue to ensure accuracy and whether or not you would qualify for any benefit.
For more information on how to limit closing costs, selecting a title company to work with, or for information on the home purchase process, contact me at [email protected] or at 202-378-0567.