Does an IRC Section 1031 real-estate exchange avoid South Carolina's deed recording fee?

Plain-English summary

South Carolina Revenue Ruling #99-2 said federal income-tax deferral under IRC § 1031 did not by itself exempt the deeds in a real-estate exchange from South Carolina's deed recording fee. Each transfer had to be analyzed under the deed-fee statutes, and the fee applied unless a listed exemption covered that deed.

When cash was the consideration, the fee was based on the cash paid. When the consideration was other property or another form of "money's worth," the ruling allowed the value to be determined from the fair market value of the consideration, the transferred realty, or the realty's property-tax value, depending on the transaction. A qualifying lien or encumbrance remaining before and after the transfer could be deducted from value.

The intermediary's role mattered. A no-consideration deed between a principal and the principal's agent was not subject to the fee in the ruling's examples. But when the intermediary bought replacement property with the intermediary's own money and the principal later reimbursed that cost, the reimbursement was consideration and the deed back to the principal was subject to the fee. A separate service fee paid only for handling the exchange was not consideration for the realty.

What this means for you

Property owners using a Section 1031 exchange

Income-tax deferral and deed-recording-fee treatment were separate questions. The ruling treated swaps, purchases, sales, direct-deeding arrangements, and intermediary structures as sequences of individual deeds, some taxable and some not.

Closing attorneys and qualified intermediaries

Document who supplied the purchase funds, whether the intermediary acted as an agent, what consideration changed hands, and whether reimbursement will occur. Those facts changed the result in the ruling's examples.

Accountants and tax professionals

The fee base could depend on cash, the fair market value of exchanged property, or an elected property-tax value. The ruling also excluded from its examples exempt transactions, entity-owner transfers, and property with liens, so those situations require the separate statutory rules it quoted.

Common questions

Q: Is a Section 1031 exchange automatically exempt from South Carolina's deed recording fee?
A: No. The ruling said the exchange is a transfer for consideration subject to the fee unless S.C. Code § 12-24-40 or another applicable rule provides an exemption.

Q: Can both deeds in a direct two-party swap be subject to the fee?
A: Yes. In the ruling's first example, each deed was separately subject to the fee based on an allowed measure of the exchanged realty's value.

Q: Are deeds to and from an intermediary always exempt?
A: No. No-consideration transfers involving an intermediary acting as the principal's agent were exempt in the examples. A transfer back to the principal became taxable when the principal reimbursed money the intermediary had supplied to buy the property.

Q: Does the intermediary's service fee count as consideration for the realty?
A: Not when it is paid solely for handling the transaction; the ruling treated that as payment for a service.

Q: Is RR 99-2 current transaction advice?
A: It is 1999 guidance. Its framework must be checked against current deed-fee statutes and the actual exchange documents before a deed is recorded.

Citations and references

• S.C. Code Ann. § 12-24-10 — fee for recording a deed transferring realty
• S.C. Code Ann. § 12-24-30 — value, fair-market-value elections, and lien deduction
• S.C. Code Ann. § 12-24-40 — enumerated exempt deeds
• IRC § 1031 — federal tax-deferral provision discussed by the ruling
• S.C. Revenue Procedure #97-8 — cited authority for the Revenue Ruling

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR99-2.pdf

Original ruling text

State of South Carolina
Department of Revenue
301 Gervais Street, P.O. Box 125, Columbia, South Carolina 29214

SC REVENUE RULING #99-2

SUBJECT:

I.R.C. Section 1031 Tax Deferred Exchanges
(Deed Recording Fee)

EFFECTIVE DATE:

Applies to all periods open under the statute.

SUPERSEDES:

All previous documents and any oral directives in conflict
herewith.

REFERENCES:

S. C. Code Ann. Section 12-24-10 (Supp. 1998)
S. C. Code Ann. Section 12-24-30 (Supp. 1998)
S. C. Code Ann. Section 12-24-40 (Supp. 1998)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1998)
SC Revenue Procedure #97-8

SCOPE:

A Revenue Ruling is the Department of Revenue’s official
advisory opinion of how laws administered by the Department are
to be applied to a specific issue or a specific set of facts, and is
provided as guidance for all persons or a particular group. It is
valid and remains in effect until superseded or modified by a
change in the statute or regulations or a subsequent court decision,
Revenue Ruling or Revenue Procedure.

Background Information:
Section 1031 of the Internal Revenue Code allows taxpayers to exchange realty and defer
the income tax due on the transaction until a later date. The tax is usually deferred until
the time the realty received through the exchange is sold. Sometimes exchanges under
Section 1031 are handled through an intermediary.
There are several ways in which a Section 1031 exchange can be handled. How these
exchanges are handle will affect the application of the deed recording fee imposed under
Code Section 12-24-10 et. seq. This ruling, by use of examples, will address the
application of the deed recording fee to such exchanges.

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Discussion:
Code Section 12-24-10 imposes the deed recording fee and reads:
In addition to all other recording fees, a recording fee will be imposed for
the privilege of recording a deed in which any lands and all improvements
on the land, tenements, or other realty is transferred to another person. The
fee is one dollar and eighty-five cents for each five hundred dollars, or
fractional part of five hundred dollars, of the realty's value as determined by
Section 12-24-30.
Code Section 12-24-30 defines the term “value” as used in the imposition and reads:
(A) For purposes of this chapter, the term “value” means the consideration
paid or to be paid in money or money’s worth for the realty including other
realty, personal property, stocks, bonds, partnership interest, and other
intangible property, the forgiveness or cancellation of a debt, the
assumption of a debt, and the surrendering of a right. The fair market value
of the consideration must be used in calculating the consideration paid in
money’s worth. Taxpayers may elect to use the fair market value of the
realty being transferred in determining fair market value of the
consideration under the provisions of this section. However, in the case of
realty transferred between a corporation, a partnership, or other entity and
its stockholder, partner, or owner, and in the case of realty transferred to a
trust or as a distribution to a trust beneficiary, “value” means the realty’s
fair market value.
(B) A deduction from value is allowed for the amount of any lien or
encumbrance existing on the land, tenement, or realty before the transfer
and remaining on the land, tenement, or realty after the transfer.
(C) Taxpayers may elect to use the fair market value as determined for
property tax purposes in determining fair market value under the provisions
of this section.
Code Section 12-24-40 provides several exemptions from the fee and reads:
Exempted from the fee imposed by this chapter are deeds:
(1) transferring realty in which the value of the realty, as defined in Code Section
12-24-30, is equal to or less than one hundred dollars;

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(2) transferring realty to the federal government or to a state, its agencies and
departments, and its political subdivisions, including school districts;
(3) that are otherwise exempted under the laws and Constitution of this State or
of the United States;
(4) transferring realty in which no gain or loss is recognized by reason of Section
1041 of the Internal Revenue Code as defined in Section 12-6-40(A);
(5) transferring realty in order to partition realty as long as no consideration is
paid for the transfer other than the interests in the realty that are being exchanged
in order to partition the realty;
(6) transferring an individual grave space at a cemetery owned by a cemetery
company licensed under Chapter 55 of Title 39;
(7) that constitute a contract for the sale of timber to be cut;
(8) transferring realty to a corporation, a partnership, or a trust in order to
become, or as, a stockholder, partner, or trust beneficiary of the entity provided
no consideration is paid for the transfer other than stock in the corporation,
interest in the partnership, beneficiary interest in the trust, or the increase in
value in such stock or interest held by the grantor. However, the transfer of
realty from a corporation, a partnership, or a trust to a stockholder, partner, or
trust beneficiary of the entity is subject to the fee even if the realty is transferred
to another corporation, a partnership, or trust;
(9) transferring realty from a family partnership to a partner or from a family
trust to a beneficiary, as long as no consideration is paid for the transfer other
than a reduction in the grantee’s interest in the partnership or trust. A “family
partnership” is a partnership whose partners are all members of the same family.
A “family trust” is a trust, in which the beneficiaries are all members of the same
family. “Family” means the grantor, the grantor’s spouse, parents, grandparents,
sisters, brothers, children, stepchildren, grandchildren, and the spouses and lineal
descendants of any the them, and the grantor’s and grantor’s spouse’s heir under
a statute of descent and distribution. A “family partnership” or “family trust”
also includes charitable entities, other family partnerships and family trusts of the
grantor, and charitable remainder and charitable lead trusts, if all the
beneficiaries are charitable entities or members of the grantor’s family. A
“charitable entity” means an entity which may receive deductible contributions
under Section 170 of the Internal Revenue Code as defined in Section 12-640(A);
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(10) transferring realty in a statutory merger or consolidation from a constituent
corporation to the continuing or new corporation;
(11) transferring realty in a merger or consolidation from a constituent
partnership to the continuing or new partnership; and,
(12) that constitute a corrective deed or a quitclaim deed used to confirm title
already vested in the grantee, provided that no consideration of any kind is paid
or is to be paid under the corrective or quitclaim deed.
(13) transferring realty subject to a mortgage to the mortgagee whether by a
deed in lieu of foreclosure executed by the mortgagor or deed executed
pursuant to foreclosure proceedings.
Based on the above, the deed recording fee is imposed for the privilege of recording a
deed based on the transaction of transferring realty from one person to another person.
When the consideration paid for realty is money, then the deed recording fee is based on
the money paid.
When the consideration paid for realty is “money’s worth” (e.g. other realty, stocks,
forgiveness of debt), then the deed recording fee is based upon one of the following:
(a) the fair market value of the consideration paid,
(b) the fair market value of the realty being transferred, or
(c) the fair market value for property tax purposes of the realty being transferred.
When the realty is being “transferred between a corporation, a partnership, or other entity
and its stockholder, partner, or owner, or the realty is being “transferred to a trust or as a
distribution to a trust beneficiary,” then the deed recording fee is based upon one of the
following:
(a) the fair market value of the realty being transferred, or
(b) the fair market value for property tax purposes of the realty being transferred.
It should also be noted that a “deduction from value is allowed for the amount of any lien
or encumbrance existing on the land, tenement, or realty before the transfer and remaining
on the land, tenement, or realty after the transfer.” As such, when the fair market value of
the realty being transferred is used to calculate the fee, the value of the lien or
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encumbrance qualifying for this deduction may be deducted from the realty’s fair market
value before calculating the deed recording fee due.
Finally, under certain Section 1031 exchanges an intermediary is employed. In most
cases, the intermediary is an agent for a principal 1 , one of the persons exchanging realty.
Under the deed recording fee law and the general and case law regarding an agent and
principal:

1. a deed transferring realty to an agent from his principal without consideration is
   exempt from the deed recording fee;
2. a deed transferring realty from an agent to his principal purchased for and with
   the funds of the principal is exempt from the deed recording fee; and,
3. a deed transferring realty from an agent to his principal purchased for and with
   the funds of the agent, who will be reimbursed by the principal for the funds
   expended in purchasing the realty, is subject to the deed recording fee since the
   reimbursement constitutes consideration under the deed recording fee law.
   Note: A fee paid by the principal to the agent solely for handling the transaction is a fee
   paid for a service and is not consideration paid for the transfer of realty.

Conclusion and Examples:
The exchange of realty pursuant Section 1031 of the Internal Revenue Code constitutes a
transfer of realty for a consideration subject to the fee unless otherwise exempted under
Code Section 12-24-40
The following examples will be used to provide guidance as to how the deed recording
fee is applied to these exchanges. In order to simplify the explanation of how the deed
recording fee applies to Section 1031 exchanges, please note that none of the
examples below involve exempt transactions under Code Section 12-24-40, realty
with a lien or encumbrance upon it, or transfers involving corporations and their
stockholders, partnerships and their partners, trusts, or trust beneficiaries.
1

As stated above, in most cases an intermediary is an agent for a principal; however, for income tax
purposes (see the regulations under I.R.C. Section 1031) certain qualified intermediaries are not treated as
agents.

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Example 1:
Two-Party Exchange or Swap: John Smith transfers realty X to Jane Doe who in turn
transfers realty Y to John Smith.
Deed 1 (Realty X) - John Smith to Jane Doe:
Subject to the fee based on one of the following:
(a) the fair market value of realty Y,
(b) the fair market value of realty X, or
(c) the fair market value for property tax purposes of either realty X or realty Y.
Deed 2 (Realty Y) - Jane Doe to John Smith:
Subject to the fee based on one of the following:
(a) the fair market value of realty X,
(b) the fair market value of realty Y, or
(c) the fair market value for property tax purposes of either realty X or realty Y.

Example 2:
Purchase and Exchange: John Smith purchases realty X from Mike Public for cash.
John Smith then transfers realty X to Jane Doe who in turn transfers realty Y to John
Smith.
Deed 1 (Realty X) - John Smith to Mike Public:
Subject to the fee based on the cash paid.
Deed 2 (Realty X) - John Smith to Jane Doe:
Subject to the fee based on one of the following:
(a) the fair market value of realty Y,
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(b) the fair market value of realty X, or
(c) the fair market value for property tax purposes of either realty X or realty
Y.
Deed 3 (Realty Y) - Jane Doe to John Smith:
Subject to the fee based on one of the following:
(a) the fair market value of realty X,
(b) the fair market value of realty Y, or
(c) the fair market value for property tax purposes of either realty X or realty
Y.
Example 3:
Exchange and Sale: John Smith transfers realty X to Jane Doe who in turn transfers
realty Y to John Smith. John Smith then transfers realty Y to Mike Public for cash.
Deed 1 (Realty X) - John Smith to Jane Doe:
Subject to the fee based on one of the following:
(a) the fair market value of realty Y,
(b) the fair market value of realty X, or
(c) the fair market value for property tax purposes of either realty X or realty
Y.
Deed 2 (Realty Y) - Jane Doe to John Smith:
Subject to the fee based on one of the following:
(a) the fair market value of realty X,
(b) the fair market value of realty Y, or
(c) the fair market value for property tax purposes of either realty X or realty
Y.
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Deed 3 (Realty Y) - John Smith to Mike Public:
Subject to the fee based on the cash paid.
Example 4:
Direct Deeding: John Smith transfers realty X to Jane Doe. Jane Doe pays cash to Mike
Public and Mike Public transfers realty Y to John Smith.
Deed 1 (Realty X) - John Smith to Jane Doe:
Subject to the fee based on one of the following:
(a) the fair market value of realty Y,
(b) the fair market value of realty X, or
(c) the fair market value for property tax purposes of either realty X or realty
Y.
Deed 2 (Realty Y) - Mike Public to John Smith:
Subject to the fee based on the cash paid by Jane Doe to Mike Public.
Example 5:
Simultaneous Exchange with Intermediary: John Smith transfers realty X to an
intermediary. The intermediary then transfers realty X to Jane Doe for cash. The
intermediary purchases realty Y from Mike Public for cash and then transfers realty Y to
John Smith.
Deed 1 (Realty X) - John Smith to Intermediary:
Not subject to the fee since the intermediary is the agent for John Smith and since
no consideration was paid for the transfer.
Deed 2 (Realty X) - Intermediary to Jane Doe:
Subject to the fee based on the cash paid.

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Deed 3 (Realty Y) - Mike Public to Intermediary:
Subject to the fee based on the cash paid.
Deed 4 (Realty Y) - Intermediary to John Smith:
Not subject to the fee since the intermediary is the agent for John Smith and since
no consideration was paid for the transfer.
Example 6:
Deferred Exchange #1 with Intermediary: In this example, the exchange is handled in
two steps since the realty being received by the taxpayer has not yet been identified.
Step 1: John Smith wants to sell realty X but wants to handle it as an exchange for income
tax reasons. Jane Doe wants to purchase realty X for cash. As such, John Smith transfers
realty X to an intermediary who then transfers realty X to Jane Doe for cash.
Deed 1 (Realty X) - John Smith to Intermediary:
Not subject to the fee since the intermediary is the agent for John Smith and since
no consideration was paid for the transfer.
Deed 2 (Realty X) - Intermediary to Jane Doe:
Subject to the fee based on the cash paid.
Step 2: At a later date when realty has been identified by John Smith to replace realty X,
the intermediary uses the cash he received in Step 1 to pay Mike Public for realty Y.
Mike Public then transfers realty Y to the intermediary. The intermediary transfers realty
Y to John Smith.
Deed 4 (Realty Y) - Mike Public to Intermediary:
Subject to the fee based on the cash paid.
Deed 5 (Realty Y) - Intermediary to John Smith:
Not subject to the fee since the intermediary is the agent for John Smith and since
no consideration was paid for the transfer.

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Example 7:
Deferred Exchange #2 with Intermediary: This example is similar to Example 6 except
that John Smith does not yet have a contract for realty X, the realty he wishes to sell. He
has, however, identified realty Y as the realty he wishes to obtain.
Step 1: Using John Smith’s money, the intermediary purchases realty Y from Mike Public
for cash. Mike Public transfers realty Y to the intermediary.
Deed 1 (Realty Y) - Mike Public to Intermediary:
Subject to the fee based on the cash paid.
Step 2: At a later date when John Smith has found a buyer for realty X, realty X is
transferred to the intermediary. The intermediary then sells realty X to Jane Doe for cash.
The intermediary transfers realty X to Jane Doe. The intermediary then transfers realty Y
to John Smith and returns to John Smith the money used in Step 1.
Deed 2 (Realty X) - John Smith to Intermediary:
Not subject to the fee since the intermediary is the agent for John Smith and since
no consideration was paid for the transfer.
Deed 3 (Realty X) - Intermediary to Jane Doe:
Subject to the fee based on the cash paid.
Deed 4 (Realty Y) - Intermediary to John Smith:
Not subject to the fee since the intermediary is the agent for John Smith and since
no consideration was paid for the transfer.
Example 8:
Deferred Exchange #3 with Intermediary: This example is similar to Example 7 except
that the intermediary does not use John Smith’s money. The intermediary uses his own
money to make the first purchase.
Step 1: Using his own money, the intermediary purchases realty Y from Mike Public for
cash. Mike Public transfers realty Y to the intermediary.

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Deed 1 (Realty Y) - Mike Public to Intermediary:
Subject to the fee based on the cash paid.
Step 2: At a later date when John Smith has found a buyer for realty X, realty X is
transferred to the intermediary. The intermediary then sells realty X to Jane Doe for cash.
The intermediary transfers realty X to Jane Doe. The intermediary then transfers realty Y
to John Smith and John Smith pays the intermediary cash as a reimbursement of the cash
the intermediary paid to purchase realty Y in Step 1 of this transaction.
Deed 2 (Realty X) - John Smith to Intermediary:
Not subject to the fee since the intermediary is the agent for John Smith and since
no consideration was paid for the transfer.
Deed 3 (Realty X) - Intermediary to Jane Doe:
Subject to the fee based on the cash paid.
Deed 4 (Realty Y) - Intermediary to John Smith:
Subject to the fee based on the cash paid as a reimbursement of the cash the
intermediary paid to purchase realty Y in Step 1 of this transaction.

SOUTH CAROLINA DEPARTMENT OF REVENUE
s/Burnet R. Maybank III
Burnet R. Maybank, III, Director

Columbia, South Carolina
, 19 99
January 11

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