Transfer Tax Debate: Fannie Mae and Freddie Mac Really Are Federal Agencies

WASHINGTON, D.C. – July 3, 2013 – (RealEstateRama) — The 6th Circuit Court of Appeals provided an answer last month to a lingering tax question impacting Michigan REALTORS® and their clients: Fannie Mae and Freddie Mac are federal agencies exempt from state and county real estate transfer taxes. This 6th Circuit ruling overturned a lower court that said two Michigan counties could collect such taxes.

For the past several months, the pendency of this issue has created a fair amount of confusion amongst the real estate community when closing deals on Fannie Mae and Freddie Mac properties. 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.” While Fannie Mae and Freddie Mac have firmly claimed they are exempt from all taxes of this nature, both agencies either already utilize or elected to adopt contract addendums to indemnify themselves from any unforeseen taxes on a sale, shifting the potential burden to a buyer. This additional financial burden on the buyer could result in an inability to close.

While the statutes provide that a seller is responsible for payment of county and state transfer taxes, a seller can contractually agree to have a buyer assume that obligation. Thus, in pending purchases for Fannie Mae and Freddie Mac, buyers were being faced with a new obligation, i.e., payment of county and state transfer tax as reflected on the HUD-1. The ruling by the 6th Circuit Court of Appeals all but eliminates that eventuality and, short of the United States Supreme Court weighing in, the ruling also sends a strongly worded message that may impact similar cases in other Circuits. MAR will continue to monitor this issue and update you accordingly.