Does Virginia's reduced recordation tax rate for 'refinancing' a deed of trust apply when a new borrower entity -- not the original borrower -- takes out the new loan to pay off the old one?

Plain-English summary

An individual owned four condominium units, each bought years earlier with its own mortgage from a different lender. In 2022, he transferred all four units to a limited liability company (LLC) he wholly owned. The LLC then took out a single new commercial loan, secured by one new deed of trust, specifically to pay off the four existing loans on those units.

When the LLC tried to record the new deed of trust at Virginia's lower "refinance" recordation tax rate, the county said no -- because the LLC, not the individual, was the borrower on the new loan, and the county read the refinance rate as requiring the same borrower on both the old and new loans. The LLC paid tax at the full standard rate under protest and appealed.

The Department sided with the taxpayer. Virginia's recordation tax statute doesn't define "refinance," and neither the plain dictionary meaning nor a related statute on refinancing priority requires the new borrower to be identical to the original borrower. Looking at the whole picture -- the same properties, the same debt being paid off, a deed of trust that itself recited the loan was to "refinance" the properties, and the common (if unremarkable) practice of transferring property into a single-member LLC for estate-planning or liability reasons -- the Department found this was genuinely a refinancing of the existing debt, just carried out through the taxpayer's own wholly-owned entity. The reduced rate applied, and the county owed a refund of the excess local recordation tax collected.

What this means for you

Real estate investors restructuring ownership through an LLC

If you move mortgaged property into your own single-member LLC and have the LLC refinance the existing debt with a new loan that pays off the old loans on those same properties, Virginia's recordation tax law doesn't automatically disqualify you from the reduced refinance rate just because the borrower's name changed on paper. What matters is whether the new loan is genuinely paying off existing debt on the same property, not a formal match between old and new borrower names.

Property owners and their attorneys drafting refinance deeds of trust

The Department gave real weight to how the deed of trust itself described the transaction -- reciting that the loan was to "refinance" the properties. That recital isn't controlling by itself, but it's evidence of the parties' intent, so it's worth getting the drafting right when you want a transaction treated as a refinance for tax purposes.

Accountants and tax professionals

This is a facts-and-circumstances ruling, not a bright-line rule -- the Department explicitly said it isn't announcing what transactions will or won't qualify as a refinance beyond these facts. Key factors here were common ownership/control between the original borrower and the new borrowing entity, the new loan paying off debt on the identical properties, and deed language reciting a refinancing purpose. A transfer to an unrelated third party who then "refinances" would present a different, unaddressed fact pattern.

Common questions

Q: Does the new borrower on a refinance loan have to be the same person as the original borrower to get Virginia's reduced recordation tax rate?
A: Not necessarily. Neither the dictionary definition of "refinance" nor the related statutory definition used for mortgage-priority purposes requires identical borrowers, and the recordation tax statute itself doesn't say so either. The Department looks at all the facts and circumstances.

Q: What facts mattered most in this ruling?
A: The new loan paid off debt on the exact same properties; the new borrower (the LLC) was wholly owned and controlled by the original borrower; and the new deed of trust itself recited that its purpose was to refinance those properties.

Q: Does this mean any transfer-then-refinance transaction qualifies for the reduced rate?
A: No. The Department was explicit that this determination applies to this case's unique facts and does not signal how it would treat other transactions -- for example, one involving an unrelated new borrower.

Q: What refund did the taxpayer get?
A: The Department directed the county to refund the local portion of the recordation tax that had been paid at the standard rate instead of the lower refinance rate, and sent a copy of its ruling to the county clerk.

Citations and references

• Va. Code § 58.1-803 A (standard recordation tax rate)
• Va. Code § 58.1-803 E 1 (reduced refinance recordation tax rate)
• Va. Code § 55.1-319 (statutory definition of "refinancing" for mortgage-priority purposes)
• Va. Code § 55.1-320 (deeds of trust construed according to their terms as contracts)
• Samson v. Board of Supervisors, 257 Va. 589, 514 S.E.2d 345 (1999) (plain-meaning rule)
• Black's Law Dictionary, Sixth Edition (definition of "refinance")
• P.D. 96-384; P.D. 06-3; P.D. 11-194 (related prior rulings)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-49

Original ruling text

April 26, 2023

Re: § 58.1-1821 Application: Recordation Tax

Dear *:

This will reply to your letter in which you request a refund of state and local recordation taxes paid by * (the “Taxpayer”) for recording a deed of trust.

FACTS

An individual acquired four condominium units in * (the “County”) between 2000 and 2004 by four separate deeds. Each unit was encumbered by a different deed of trust with different lenders. The four units were transferred to the Taxpayer, a limited liability company (LLC), by the individual in March 2022. The individual was the sole member of the Taxpayer.

The Taxpayer negotiated with a lender to issue a single loan secured by a deed of trust in order to pay off the four existing loans on the units. This new deed of trust provided that the lender had made a commercial mortgage loan to the Taxpayer to provide funds to refinance the four units.

The Taxpayer attempted to record the new deed of trust in the County at the rate allowed for deeds of trust for refinancing. The County disallowed the recording of the deed of trust at the refinancing rate because the Taxpayer was not the borrower on the original deeds of trust. At the County’s request, the Taxpayer removed a refinancing notation from the deed of trust and paid the recording tax at the standard rate. The Taxpayer appealed, contending that the deed of trust it recorded with the County was for a refinancing and that it should have paid recording tax at the refinancing rate.

DETERMINATION

Virginia Code § 58.1-803 A imposes the recordation tax on deeds of trust or mortgages “at a rate of 25 cents on every $100 or portion thereof of the amount of bonds or other obligations secured thereby.” Virginia Code § 58.1-803 E 1, however, provides that recordation tax is paid on refinanced deeds of trust or mortgages according to a schedule that is at rates lower than those assessed pursuant to Virginia Code § 58.1-803 A. Specifically, Virginia Code § 58.1-803 E 1 provides that these special rates apply to “deeds of trust or mortgages, the purpose of which is to secure the refinancing of an existing debt, which debt is secured by a deed of trust or mortgage on which the tax imposed hereunder has been paid . . . .”

The Taxpayer contends that the deed of trust it recorded secured the refinancing of the four existing deeds of trust on the condominium units for which the recordation tax had been paid and that there is no statutory requirement for the borrowers on the original deeds of trust and the refinance deed of trust to be the same.

The Code does not define “refinance” or “refinancing” for purposes of the recordation tax. Absent a statutory definition, the plain and ordinary meaning of the term is controlling. See Samson v. Board of Supervisors , 257 Va. 589, 514 S.E.2d 345 (1999). “Refinance” is defined as “to pay off existing debts with funds secured from new debt; to extend the maturity date and/or increase the amount of an existing debt; to arrange for a new payment schedule” and “the discharge of an obligation with funds acquired through the creation of a new debt, or at a different interest rate.” Black’s Law Dictionary, Sixth Edition, p. 1281. In addition, Virginia Code § 55.1-319, which addresses the priority of a residential refinance over subordinate mortgages, defines “refinancing” as “the replacement of a loan secured by a prior mortgage with a new loan secured by a refinance mortgage and the payment in full of the debt owed under the original loan secured by the prior mortgage.” Neither definition requires that the borrowers on the refinancing mortgage be the same as the borrowers on the original mortgage. In addition, the plain language of Virginia Code § 58.1-803 does not necessarily require the borrowers to be the same.

In the Department’s opinion, the question of whether a deed of trust was to secure the refinancing of an existing debt must be determined with reference to all the facts and circumstances. In this case, an individual transferred the properties in question to the Taxpayer, an LLC of which he was the sole member. As described by the recital of facts that prefaced the deed of trust, the lender made a loan to the Taxpayer to provide funds to refinance the properties in question. Although the recitals themselves are not controlling, they are instructive in conveying the intent of the parties. The Department also observes that conveyances of property by individuals to entities they control, such as grantor trusts or single member LLCs, are not uncommon as estate planning techniques, or with a business purpose in mind, such as liability protection.

Virginia Code § 55.1-320 provides that “[e]very deed of trust . . . is in the nature of a contract and shall be construed according to its terms to the extent not in conflict with the requirements of law.” In this case, it is clear that the new loan was the responsibility of a business entity of which the original borrower had sole control and that the new loan proceeds were intended to pay off the borrower’s previous debt on the same properties that were now titled in the entity’s name. In addition, as stated above, the deed of trust clearly indicates it was the intent of the parties to refinance the exisiting debt.

Accordingly, the deed of trust recorded by the Taxpayer was for a refinancing and thus qualified for the rates provided by Virginia Code § 58.1-803 E. As such, the Department will refund the appropriate amount of the tax for recording the deed of trust. The Department will send a copy of this letter to the Clerk of the County and a refund of the local portion of the tax on the deed of trust will be issued by the County.

The Taxpayer and the County should be aware that this determination applies to the unique facts of this case, and the Department expresses no further opinion concerning what transactions may or may not qualify as a refinanced deed of trust or mortgage for recordation tax purposes.

The Code of Virginia sections 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/4182.B

Related Documents

96-384

06-3

11-194