Understanding The New Montgomery County Recordation Tax Changes

On May 9, 2023, the Montgomery County Council in Maryland passed Bill 17-23, fundamentally changing the structure of real estate recordation taxes. This vote, which saw a 7-4 outcome in favor, was sponsored by Councilmember Kristin Mink and co-sponsored by Councilmember Will Jawando . Effective from October 1, 2023, this legislation introduces tiered recordation tax rates for high-value property transactions, while leaving base rates and school increment rates unchanged.

What is a Recordation Tax?

A recordation tax is a one-time fee applied during the purchase, sale, or financing of real estate to register the transaction as a public record. The tax is calculated based on the "consideration," which refers to the purchase price or value exchanged in property transactions, or the amount of "new debt" in mortgage scenarios.

Components of Montgomery County Recordation Tax

Montgomery County's recordation tax system is comprised of three components:

1. Base Rate: $2.08 per $500 of the sale price or new debt. The proceeds are allocated to the County's general fund.
2. School Increment: $2.37 per $500, with proceeds going to Montgomery County Public School capital projects.
3. Premium Rate: This rate applies to values over $500,000 and is undergoing significant changes under Bill 17-23.

What Changes Does Bill 17-23 Bring?

The primary change is in the Premium Rate, which is now structured as a tiered system based on the property's value. The new Premium Rates are:

• For $500,000 to $600,000: No change, remains at $2.30/$500.
• For $600,001 to $750,000: Increased to $5.75/$500.
• For $750,001 to $1,000,000: Increased to $6.33/$500.
• For over $1,000,000: Increased to $6.90/$500.

Understanding the Math with Examples

Let's consider two examples to elucidate the financial implications:

Example 1: Property priced at $650,000

Existing Tax Structure:

• Base Rate: ($650,000/$500) * $2.08 = $2,704
• School Increment: ($650,000/$500) * $2.37 = $3,085
• Premium Rate: (considering all amount over $500,000): ($150,000/$500) * $2.30 = $690(This calculation only applies the premium rate to the amount over $500,000)
• Total Tax (Existing): $2,704 + $3,085 + $690 = $6,479

New Tax Structure:

• Base Rate: ($650,000/$500) * $2.08 = $2,704
• School Increment: ($650,000/$500) * $2.37 = $3,085
• Premium Rate (for $600,001 to $750,000 tier): ($150,000/$500) * $5.75 = $1,725(Again, only applying the premium rate to the amount over $500,000)
• Total Tax (New): $2,704 + $3,085 + $1,725 = $7,514
• Difference: $7,514 - $6,479 = $1,035 increased tax

Example 2: Property priced at $1,100,000

Existing Tax Structure:

• Base Rate: ($1,100,000/$500) * $2.08 = $4,576
• School Increment: ($1,100,000/$500) * $2.37 = $5,202
• Premium Rate: (for all amount over $500,000): ($600,000/$500) * $2.30 = $2,760
• Total Tax (Existing): $4,576 + $5,202 + $2,760 = $12,538

New Tax Structure:

• Base Rate: ($1,100,000/$500) * $2.08 = $4,576
• School Increment: ($1,100,000/$500) * $2.37 = $5,202
• Premium Rate (for above $1,000,000 tier): ($100,000/$500) * $6.90 = $1,380 (only for the amount over $1,000,000)
• Premium Rate (for $750,001 to $1,000,000 tier): ($250,000/$500) * $6.33 = $3,165
• Premium Rate (for $600,001 to $750,000 tier): ($150,000/$500) * $5.75 = $1,725
• Total Tax (New): $4,576 + $5,202 + $1,380 + $3,165 + $1,725 = $16,048
• Difference: $16,048 - $12,538 = $3,510 increased tax

Implications for Stakeholders

• Realtors: Your role in advising clients on financial aspects of a real estate transaction has never been more critical. It's essential to update your financial models to reflect these changes.
• Homeowners and Homebuyers: If you're considering a transaction, especially in the higher tiers of property value, it's crucial to budget for these substantial tax increases.

In Summary

Bill 17-23 addresses Montgomery County's pressing needs for capital projects and rent assistance. Despite the tax burden it imposes, the increased revenue aims to benefit education and housing.

It's vital for all stakeholders to understand these changes in detail and consult financial advisors or real estate professionals for tailored advice. With proper planning and knowledge, navigating this new tax landscape should be manageable.

The contents herein are provided for informational purposes only and do not constitute legal advice. Neither transmission nor receipt of such materials will establish an attorney-client relationship. Recipients and online users are advised to seek professional legal counsel prior to taking action based on this information.

References:

1. Montgomery Planning Board. (2023). Bill 17-23 staff report. https://montgomeryplanningboard.org/wp-content/uploads/2023/04/Bill-17-23-Staff-Report_Final_Revised.pdf
2. Montgomery County Department of Finance. (n.d.). Bill 17-23. https://www.montgomerycountymd.gov/Finance/bill17-23.html