Could existing leasehold interests reduce the property value used for Virginia grantor tax when the fee and leases were sold together?

Subject

Leasehold interests; Recordation Tax

Plain-English summary

Virginia concluded that the leasehold interests remained separate encumbrances and had to be excluded when valuing the property interest conveyed by deed. The owner and tenant sold their respective fee and leasehold interests to the same purchaser, but the purchase agreement, assignments, and deed expressly prevented merger and kept the deed subject to the leases.

The county had calculated grantor tax from the full assessed value, which did not account for the leaseholds. The Department found that value did not accurately represent the owner's conveyed interest.

The circuit-court clerk had to determine the property's actual value excluding the leasehold interests, considering the taxpayer's appraisal and other reliable information. Under § 58.1-802, tax then applied to the higher of that revalued amount or the consideration paid for the owner's interest.

After the county reported the correct value, the Department would issue the appropriate state recordation-tax refund. The county was responsible for any local-tax refund.

What this means for you

• Common ownership does not always merge a lease into the fee when transaction documents clearly preserve separate interests.
• A real-estate assessment carries a strong presumption but can be displaced by clear and cogent evidence that it does not reflect transaction-date fair market value.
• Record the deed, assignments, purchase agreement, nonmerger clauses, and appraisal together as evidence of the actual interest conveyed.

Common questions

Q: Why was a leasehold treated as an encumbrance?
A: It was a property right that was not an ownership interest and could lessen the fee interest's value.

Q: Did the Department itself set the final property value?
A: No. The clerk was asked to determine it from the appraisal and other reliable local information.

Q: Which amount controlled the tax?
A: The higher of the consideration or the actual value determined after excluding the leasehold interests.

Citations and references

• Va. Code § 58.1-802.
• Garland v. Pamplin, 73 Va. 305 (1879).
• Venator Group Specialty, Inc. v. MLK Associates Limited Partnership, 56 Va. Cir. 41 (2001).
• Shoosmith Brothers, Inc. v. County of Chesterfield, 268 Va. 241, 601 S.E.2d 641 (2004).
• Tidewater Psychiatric Institute, Inc. v. Virginia Beach, 256 Va. 136, 501 S.E.2d 761 (1998).
• Public Documents 91-146, 00-97, 06-77, and 12-61.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-44

Original ruling text

March 24, 2014

Re: § 58.1-1821 Application: Recordation Tax

Dear *:

This will reply to your letter in which you request a refund of the state and local grantor taxes paid by * (the "Taxpayer") for recording a deed. I apologize for the delay in responding to your request.

FACTS

The Taxpayer owned property that was subject to leasehold interests held by another party (the "Tenant"). In the same transaction, the Taxpayer and Tenant sold their respective interests to a third party (the "Purchaser"). Both the lease assignments and the purchase agreement provided that the title to the property and the leasehold interests would not merge as a result of the sale. The deed also provided that the property was conveyed subject to the leasehold interests.

In March, 2013, the Taxpayer and the Tenant presented the assignments of their leasehold interests for recordation to the Clerk of the Circuit Court of * (the "County"). The Taxpayer also presented the deed for recordation. The County assessed grantor's tax against the deed based on the assessed value of the property, which did not account for the leasehold interests and which was greater than the consideration paid for the conveyance of the Taxpayer's interest.

Pursuant to a separate written agreement, the Taxpayer and Tenant each paid half of the tax assessed, and the Taxpayer filed a claim for refund on their behalf. The Taxpayer contends that the County should have based the grantor's tax on the consideration paid for the Taxpayer's interest, which was greater than the value of the property as indicated by an appraisal which accounted for the leasehold interests.

DETERMINATION

Leasehold Interests

Virginia Code § 58.1-802 imposes a grantor's tax of 50¢ on every $500 or fraction thereof, exclusive of any lien or encumbrance remaining thereon at the time of the sale, on the greater of the actual value of the property conveyed or the consideration of the sale. An encumbrance is "a claim or liability that is attached to property or some other right and that may lessen its value, such as a lien or mortgage; any property right that is not an ownership interest." Black's Law Dictionary 568 (8 th ed. 2004). As a property right that is not an ownership interest, a leasehold interest is an encumbrance.

Generally, a lesser interest in property will be merged into a greater interest when they are held by the same person, at the same time, and in the same right and no intermediate interest exists. See Garland v. Pamplin , 73 Va. 305, 1879 WL 5410 (1879). The presumption that parties intended a merger, however, is rebuttable. See Venator Group Specialty, Inc. v. MLK Assocs. Ltd. P'ship , 56 Va. Cir. 41, 2001 WL 543418 (2001).

At closing, the Purchaser received the deed to the property and assignments of the leasehold interests. The purchase agreement and assignments, however, provided that the leasehold interests would not terminate or merge as a result of such common ownership. The deed also provided that the property was conveyed subject to the leasehold interests. Thus, under these conditions, the leasehold interests remained separate from the land at the time of sale. As such, the value of the leasehold interest would be excluded for purposes of determining the grantor's tax.

Valuation

The Taxpayer contends that the grantor's tax should have been based on the consideration received for its interest because it was greater than the value of the property as determined by an appraisal which accounted for the leasehold interests.

The assessed value of real estate is accorded a very strong presumption of accuracy in determining fair market value. See Shoosmith Bros., Inc. v. County of Chesterfield , 268 Va. 241, 601 S.E.2d 641 (2004) and Tidewater Psychiatric Institute, Inc. v. Virginia Beach , 256 Va. 136, 501 S.E.2d 761 (1998). A clerk of the circuit court is not required to use the assessed value to the exclusion of other reliable information as to the current fair market value. If it can be shown by clear and cogent evidence why the assessed value does not reflect fair market value as of the date of the transaction, the clerk has the authority to rely on such evidence to determine the proper amount of the recordation tax. See Public Document (P.D.) 00-97 (5/26/2000), P.D. 06-77 (8/23/2006), and P.D. 12-61 (4/27/2012).

Placing a value on real estate is entirely a factual determination that is best made by one who is thoroughly familiar with the property itself and local market conditions. This responsibility lies with the Clerk when the value must be determined for recordation tax purposes. See P.D. 91-146 (8/2/1991).

In this case, the assessed value did not account for the leasehold interests. As such, it did not accurately reflect the fair market value of the Taxpayer's interest at the time of the sale. The Department, therefore, will send a copy of this letter to the Clerk of the County and request that the actual value of the property be determined, exclusive of the value of the leasehold interests, taking into consideration the Taxpayer's appraisal and all other relevant and reliable information available. Pursuant to Va. Code § 58.1 - 802, the grantor's tax shall be based on the higher of the consideration or the value as so determined. When the County informs the Department of the correct fair market value, the Department will refund the appropriate amount of state recordation tax. A refund of the local recordation tax would be issued by the County.

The Code of Virginia section and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact *in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5434158695.M