Did a Virginia property owner receive recordation-tax refunds when a deed to a relative was followed by foreclosure the next day?

Subject

Foreclosure did not undo the deed tax, but no consideration supported a grantor's-tax refund

Plain-English summary

Virginia granted only a partial recordation-tax refund after an owner deeded property to a relative one day before foreclosure. When the deed was recorded, the owner still held valuable rights that could be conveyed. The next day's foreclosure extinguished those rights but did not invalidate the earlier deed, so the state and local tax based on the property's actual value remained due.

The deed also did not qualify as a deed of gift because it was labeled a deed of bargain and sale and did not state that it was a gift. Virginia noted that a deed of correction could potentially support the gift exemption if the transaction truly was a gift, but mutual promises or other benefits could constitute consideration.

For the separate grantor's tax, Virginia found no consideration. Any promise by the relative to become liable on proposed financing was worthless after the bank refused to postpone foreclosure. The owner was therefore entitled to a refund of the state grantor's-tax share and could present the ruling to the circuit court clerk for the local share.

What this means for you

• Recordation tax is tested when the deed is recorded; a later foreclosure does not retroactively erase the conveyance.
• A deed-of-gift exemption requires the deed itself to state that it is a deed of gift.
• Consideration can include promises, assumed liabilities, and other benefits, not just cash.
• Virginia's deed tax based on value and grantor's tax based on consideration can produce different refund results.
• Local refund components may need to be requested from the recording court's clerk.

Common questions

Why was the value-based deed tax not refunded?

The owner still possessed and conveyed valuable property rights when the deed was recorded, even though foreclosure extinguished them the next day.

Did the deed qualify automatically as a gift because no money was paid?

No. It was not drafted as a deed of gift, and noncash promises or benefits can also be consideration.

Which tax was refunded?

The grantor's tax under Va. Code § 58.1-802. Virginia issued the state portion, and the owner was directed to request the local portion from the circuit court clerk.

Citations and references

• Va. Code §§ 58.1-801, 58.1-802, and 58.1-811(D).
• Virginia Public Document 93-312.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-130

Original ruling text

July 9, 2010

Re: § 58.1-1821 Application: Refund of Recordation Tax

Dear *:

This is in response to your request for a refund of recordation tax that you paid on April 26, 2010, to record a deed of bargain and sale conveying 3.049 acres in the * magisterial District in *** (the "property") to a relative.

FACTS

Because foreclosure of the loan on your property was imminent, you were arranging financing through the Rural Development program of the U.S. Department of Agriculture, and so informed your bank. A relative of yours would be either the primary or secondary obligor on the proposed loan, so you had a deed prepared and recorded that conveyed your interest in the property to your relative. Although the deed was labeled a deed of bargain and sale, and recited that the conveyance was "for and in consideration of the sum of ten dollars and other good and valuable consideration," it appears that no money was paid.

When presented for recordation the clerk imposed the normal state and local recordation taxes on the deed based upon an amount that you state was the value the property would bring in a sale; in other words, your estimate of the fair market value. The taxes collected were the state recordation tax under Va. Code § 58.1-801, along with the related local tax, and the state and local shares of the tax under Va. Code § 58.1-802 (the grantor's tax).

The day after the deed was recorded the bank caused a foreclosure sale to be conducted, and a few weeks later a deed was recorded by which the substitute trustee conveyed the same property to the purchaser at the foreclosure sale. Upon learning of this deed, and realizing that your deed did not accomplish its objective of conveying the property to your relative, you requested a refund of the state and local recordation taxes that you paid upon recording the deed.

RULING

Under Va. Code § 58.1-801 a tax is imposed on the recordation of every deed conveying real estate based on the consideration of the deed or the actual value of the property conveyed, whichever is greater. Since no money was paid, the tax appears to have been properly based upon the actual value that you provided to the clerk at the time of recordation. A local tax equal to one-third of the state tax was also properly imposed.

Your basis for requesting a refund is that the subsequent foreclosure sale and deed rendered your deed ineffective. That would have been true if the foreclosure sale had occurred the day before your deed was recorded. But at the time your deed was recorded you were still the owner and still had rights in the property that could be conveyed by deed, and those rights had value that could be taxed. The fact that the rights you conveyed to your relative were extinguished a day later by the foreclosure sale does not invalidate your deed.

One exemption that might apply to this transaction is to treat it as a gift. In order for the deed to be exempt from tax, Va. Code § 58.1-811 D requires that "Such deed shall state therein that it is a deed of gift." Because the deed was a deed of bargain and sale rather than a deed of gift, it cannot qualify for the exemption for deeds of gift. If the conveyance was, in fact, a gift, then a deed of correction may be prepared and recorded, which would make your deed eligible for a refund of the recordation tax paid.

Although no money was paid, that does not necessarily indicate that the transaction was a gift. As stated in a 1993 ruling: "the term 'consideration' is much broader than money. It includes anything of value, such as assuming or releasing a liability of the grantor, an agreement to share future profit, or any other benefits even if they are subject to contingencies." P.D. No. 93-312 (10/17/93). You have not provided much information about the arrangement you had with your relative in connection with the property conveyed by the deed. It appears that you intended to continue living on the property. It is conceivable that a thorough analysis of the transaction would indicate that the agreement between you and your relative involved mutual promises, such as your relative agreeing to become liable for payment of the new loan that you were seeking, which could be construed as consideration. If such agreements existed it would mean that the transaction was not a gift.

Another exemption that might apply to the transaction is if your relative agreed to hold the property in trust for you for the duration of the contemplated loan you were seeking from the USDA Rural Development program. If so, the trust appears to have been oral since there is no indication of a written trust instrument. In any event, the deed does not convey the property to your relative as a trustee.

Although the facts provided do not support your application for a refund of the tax imposed under Va. Code § 58.1-801 (and the related local tax), I do find that the lack of money paid, and the other facts that you have provided about the transaction, limited though they are, indicate that there was no consideration for your deed. Even if the relative had promised to become liable for the new loan you were seeking, I find that such a promise was worthless because of the scheduled foreclosure sale and the bank's refusal to postpone it so that the new loan could be obtained.

The grantor's tax imposed by Va. Code § 58.1-802 is imposed on the consideration, if known. The fact that the deed was not drafted in a manner to qualify for other exemptions does not subject it to the grantor's tax if no consideration existed for the conveyance. Therefore, you are entitled to a refund of the grantor's tax imposed under Va. Code § 58.1-802. This tax is split half to the state and half to the locality. You will shortly receive a refund of the state portion of the tax. You should present this letter to the clerk of the circuit court where you recorded the deed to request a refund of the local portion of the grantor's tax.

I trust that this reply answers your ruling request. The Code of Virginia sections cited and other reference documents are available on-line in the Tax Policy Library section of the Department of Taxation's web site located at www.tax.virginia.qov . If you should have any questions regarding this ruling, you may contact * in the Office of Policy and Administration, Policy Development, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

1-4499596851