Issue: The Michigan Department of Treasury was asked by certain registers of deeds whether particular entities, such as Fannie Mae and Freddie Mac, were subject to the county and state real estate transfer tax. On October 4, 2011, Treasury advised the Emmet County Register of Deeds that the answer was yes – Fannie Mae and Freddie Mac, as sellers of real estate in Michigan, must pay county and state transfer tax. As a result of this interpretation, the issue of whether or not Fannie Mae and Freddie Mac must pay transfer tax has resulted in legal action in counties around the state.
In March, 2012, Oakland County claimed the first victory against Fannie Mae and Freddie Mac in federal district court. The court ruled that Fannie Mae and Freddie Mac are liable for transfer taxes. As a result, this decision has emboldened other counties to begin requiring that Fannie Mae and Freddie Mac pay transfer tax as well. While the Oakland County case may still be appealed, the aforementioned ruling by the Michigan Department of Treasury is supported by the at least one federal district court’s decision.
Background: By way of background, Fannie Mae and Freddie Mac had previously avoided paying both county and state transfer tax relying on an exemption in both those statutes for “written instruments which this state is prohibited from taxing under the constitution or statutes of the United States.” In its letter, Treasury indicated that federal law generally prohibits the taxation of these entities by state and local governments. However, Treasury has concluded that the real estate transfer tax is not a tax on real property, but instead is an excise tax on the instrument that is being recorded. Thus, Treasury concludes that government sponsored entities, such as Fannie Mae and Freddie Mac are not exempt from real estate transfer tax.
The law provides that a seller is responsible for payment of county and state transfer taxes. However, a seller can contractually agree to have a buyer assume that obligation. Generally, Fannie Mae and Freddie Mac use addendums which impose all liability for transfer tax on buyers. Thus, in pending purchases for Fannie Mae and Freddie Mac, buyers will now need to deal with a new obligation, i.e., payment of county and state transfer tax as reflected on the HUD-1.
Impact: Presently, there does not appear to be any viable theory for imposing liability on REALTORS® involved in the transaction where either there was a failure to pay the transfer tax or there is now transfer tax which must be paid by a buyer.
While Fannie Mae and Freddie Mac maintain that the exemptions are still applicable and may appeal the adverse federal court riling, both entities have been utilizing the aforementioned addendums to shift the transfer tax and any unpaid taxes to the buyer. Whether or not the state or county can reach back and reclaim unpaid transfer tax retroactively is still a gray area, subject to appeal and limitation periods. Whether or not Fannie Mae or Freddie Mac will attempt to enforce addendums against past and present buyers is something MAR will be monitoring as well. We are encouraging all members to urge their clients to hold on to all closing documentation.