When the same lender recorded a replacement mortgage to increase a home-equity line, was recordation tax due again on the existing principal?

Subject

Same-lender refinancing was taxed only on the credit-line increase

Plain-English summary

Virginia ruled that recordation tax applied only to the increase in a home-equity credit line, not again to the existing principal. The same lender held the original debt and provided the replacement mortgage, and recordation tax had already been paid on the original deed of trust.

Va. Code § 58.1-803(D) covered a same-lender refinancing or modification and taxed only the new obligation above the existing secured debt. That conclusion applied to both processing scenarios presented, even though the lender's automated system had failed and tax was paid on the full replacement amount.

Refund procedure and timing still mattered. The Department would coordinate documentation for the voluminous claims, but refinancings recorded more than three years before the protective claim were not refundable.

What this means for you

• The lender providing the refinancing had to be the lender holding the existing debt.
• Prior tax payment on the existing secured debt was essential.
• Only added credit was taxable under the stated replacement-mortgage facts.
• The substantive exemption did not rescue refund claims outside the three-year period.

Citations and references

• Va. Code §§ 58.1-803(A), (D), 58.1-1821, and 58.1-1824.
• 1992 Att'y Gen. Ann. Rep. 181.
• P.D. 96-384.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-65

Original ruling text

May 13, 2009

Re: § 58.1-1824 Application: Recordation Tax

Dear *:

This will reply to your letter in which you seek a refund of recordation tax paid by ** (the"Taxpayer") for certain refinanced deeds of trust.

FACTS

The Taxpayer provided "no-fee" home equity lines of credit in which it paid the recordation taxes. When a customer wanted to increase its line of credit, the request was processed through an automated system that was designed to ensure the Taxpayer only paid recordation on the incremental increase.

For various reasons, certain credit line increase requests were not processed through the Taxpayer's automated system, resulting in recordation tax being paid on the original deed of trust as well as the incremental increase. The Taxpayer has presented two scenarios in which the credit line increases did not get processed through the automated system.

Scenario 1

A customer with a home equity line of credit would apply for an increase in its line of credit. When increasing a line of credit, it was the Taxpayer's policy to file for recordation of the new mortgage related to the new lines of credit before filing for the release of the lien relating to the old line of credit. Because the line increases were not processed through the Taxpayer's automated system, the Taxpayer paid recordation taxes on the entire amount of the new mortgage.

Scenario 2

A customer applied for a home equity line of credit. If the application was approved, the Taxpayer recorded the mortgage related to the line of credit and paid recordation taxes on the line of credit. Subsequent to the approval, the customer would apply for an increase in its line of credit. The Taxpayer recorded the increase and paid additional recordation taxes on the increase. The customer then applied for an additional increase or the original increase would be adjusted. The Taxpayer recorded the new mortgage related to the new lines of credit before filing for release of the lien relating to the old lines of credit. When the second increase was not processed through the automated system, recordation taxes would be based on the original amount of the mortgage as well as the first line increase.

The Taxpayer seeks a ruling affirming that in the two fact scenarios only the increase credit line above the amount of the original mortgage would be subject to recordation tax.

DETERMINATION

Pursuant to the authority granted the Tax Commissioner under Va. Code § 58.1­1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Va. Code § 58.1-1821. As permitted by statute, the Taxpayer's request has been treated as an appeal under Va. Code § 58.1-1821.

Virginia Code § 58.1-803 A imposes the recordation tax on deeds of trust, mortgages, and supplemental indentures. Virginia Code § 58.1-803 D exempts from the recordation tax certain refinanced deeds of trust and mortgages by providing that:

On deeds of trust or mortgages, the purpose of which is to refinance or modify the terms of an existing debt with the same lender , which debt is secured by a deed of trust or mortgage on which the tax imposed hereunder has been paid, the tax shall be paid only on that portion of the amount of the bond or other obligation secured thereby which is in addition to the amount of the existing debt secured by a deed of trust or mortgage on which the tax has been paid. [Emphasis added.]

When a deed of trust is used in refinancing an existing debt with the same lender and the tax has been previously paid on the original deed of trust securing the debt, the recordation tax will not apply to the deed of trust for the existing debt.

The Virginia Attorney General opined on this exemption in 1992 Att'y Gen. Ann. Rep. 181. The opinion interprets the phrase "existing debt with the same lender" to mean that the "existing debt, rather than the original debt, be with the same lender who is providing the refinancing." The Attorney General, further, concluded that the "same lender" in Va. Code § 58.1-803 D means that the lender providing the refinancing must be the same as the lender now holding the existing debt being refinanced. The recordation tax exemption, therefore, applies when the existing debt is being refinanced by the lender who holds the debt. The Commissioner agreed with the Attorney General's interpretation in Public Document (P.D.) 96-384 (12/20/1996).

In both fact scenarios, the increase in the credit line is a modification of the original mortgage. The Taxpayer is the lender of both the original credit line and the increase. As such, in the two fact scenarios represented, the recordation tax would not apply to the original credit line, only to the credit line increase.

Due to the voluminous nature of these refund requests, the Taxpayer has also requested to discuss what procedures and necessary documentation would be required for the Department to address these claims. To facilitate this process, the Property Tax Section of the Office of Customer Services has been briefed on this situation and will contact you to determine the required procedures and documentation.

I would note that under Va. Code § 58.1-1824, a protective claim for refund preserves a taxpayer's judicial remedies when filed within three years of the date of a tax assessment. As such, any of the refinancings recorded more than three years prior to the date that the Taxpayer's protective claim was filed are not subject to refund.

The Code of Virginia and regulation sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this ruling, please contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3082785465.B