Documentary Stamp Tax Pitfalls Murphy Berglund 1

Documentary Stamp Tax Pitfalls

Have you recently got engaged or married?

Now that you are about to embark on a lifelong commitment to your loved one, it is important to think about joint bank accounts, possibly combining your assets and even a prenuptial agreement. Every financial decision must be looked at when combining households and each action may have a legal implication. One of the questions we are frequently asked is “Should I add my new spouse to the deed of my house?”  Before deciding whether to do so you must understand the legal and documentary stamp tax implications of the “gift”. You may ask yourself – “What on earth is a documentary stamp tax?”

Let us paint the picture of what a documentary stamp tax is and how it can affect you and your family:

Recent newlyweds had evaluated their assets and wanted to combine their wealth. They decided to execute deeds that would convey each of their respective properties into their names jointly, as gifts.

In addition to combining their wealth, this decision offered benefits like inheritance and asset protection. The couple was able to handle the entire process with minimal effort and a nominal recording fee at the county clerk’s office, and it seemed like everything was settled.

However, a few weeks later, surprise notices arrive in the mail from the Florida Department of Revenue, informing the newlyweds that they owe a total of $21,000 for “documentary stamp taxes.”

The newlyweds are in shock.

What seemed to be a simple transaction to re-title their real estate assets has now turned into a financial nightmare. The couple had no idea that the state collected documentary stamp tax on the amount of any existing mortgages on the properties – especially when the transfer of real estate was a gift between spouses.

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So, where did things go wrong?

In the state of Florida, when property is transferred, documentary stamp tax is assessed on any outstanding mortgage debt at a rate of 70 cents per every 100 dollars.  This includes when property is transferred from one spouse to another.  If only HALF of the property is transferred (in this case from husband solely to husband and wife jointly) then the documentary stamp tax is only on half of the outstanding mortgage.

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There are some other situations where the documentary stamp tax is assessed at the surprise of individuals. One of these situations is the transfer of property into a trust where the beneficiaries of the trust are different than the property owner.

If the property has a current mortgage and the trust beneficiaries are individuals other than or in addition to the grantor, the documentary stamp tax will be assessed. In this scenario, the tax may even apply to the entire mortgage balance – resulting in a significant amount owed.

Another situation where the documentary tax stamp is applied is when property is transferred from an owner to his/her corporation, partnership, or limited liability company. Oftentimes, individuals make these decisions for the purpose of estate planning, but the tax is still due.

The real pitfall here, is that in each of these situations, individuals may only find out about the taxes long after a deed is recorded at the county courthouse where a tax form must be filed for every real estate transfer. These tax forms are audited by the Florida Department of Revenue, and if transfer tax was not paid or was miscalculated, then the taxes will be assessed.

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We encourage everyone planning to transfer property – whether as a gift, as part of a trust, or as a business transaction – to consult an experienced real estate attorney. The transfer of real property requires careful planning to ensure that the minimum documentary stamp tax is assessed for your transaction.

To schedule a consultation to discuss your real estate transactions, contact our office today. We look forward to helping you make the best decisions for yourself, your family, and your business.