EXTRAS ON EXCISE: ARE FANNIE MAE AND FREDDIE MAC OFF LIMITS FOR TRANSFER TAXES?

In states that impose real estate transfer taxes, people generally do not get a pass on paying them – except, according to several recent court cases, mortgage giants Fannie Mae and Freddie Mac and their conservator, the Federal Housing Finance Agency (FHFA).

The idea behind the real estate transfer tax (sometimes known as a document transfer tax or a deed transfer tax, depending on the state) is that people or organizations transferring real estate must pay a tax on the transfer – usually based on the amount for which the property is sold. For example, Illinois imposes a tax of 50 cents for every $500 of real property transferred under 35 ILCS 200/31-10.   

The question at the heart of several recent cases is what the real estate transfer tax is – is it a tax on real estate, or is it a tax on a transfer?

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) hold mortgages on many properties across the country, because the organizations create liquidity in the housing market by purchasing mortgages from lenders, giving lenders more money to lend to home buyers, and then selling them as mortgage-backed securities or otherwise investing them.

As Fannie Mae and Freddie Mac transfer real estate, some of the state and local governments that impose real estate transfer taxes have issued assessments against them. In one class action in the U.S. Court of Appeals for the Eighth Circuit, Hennepin County v. Fannie Mae, Hennepin County alleged that the quasi-governmental agencies owe Minnesota an estimated $5 million to $5.6 million in back taxes on real estate transfers.  

But the problem with imposing these kinds of transfer taxes on Fannie Mae and Freddie Mac, according to several courts, is that both organizations have federal agency charters that exempt them from all tax imposed by any state, with the exception of taxes on real property. And courts have generally found that transfer taxes are taxes on transfers of real property, not taxes on real property itself, so state and local governments cannot tax the transfers by these agencies. For example, check out County of Oakland v. Federal Housing Finance Agency, 716 F.3d 935 (6th Cir. 2013), DeKalb County v. Federal Housing Finance Agency, Nos. 13-1558, -1559, -1611 and -2739 (7th Cir. Dec. 23, 2013) and Spoonamore v. Federal Housing Finance Agency, No. 12-220-DLB-CJS (E. D. Ky. Jan. 17, 2014).

Sometimes, the parties seeking to impose the transfer taxes on Fannie Mae and Freddie Mac also make the argument that the agencies must pay the tax because they are both private companies. (For example, the appellants argued this in DeKalb.)  While it is true that the agencies are private entities, courts have said the federal charter still exempts them from the tax.

Fannie Mae’s and Freddie Mac’s investors would presumably be happy to hear that courts are generally keeping the agencies from paying these taxes. Bloomberg Businessweek reported last year that Fannie Mae and Freddie Mac own or guarantee $5.2 trillion in mortgages and back more than two-thirds of mortgages currently being originated.  

Continue the discussion on Bloomberg BNA’s State Tax LinkedIn page: Do you think Fannie Mae and Freddie Mac’s state tax exemption should be amended to subject them to other types of tax besides real property tax?

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REBECCA HELMES

Rebecca Helmes’ “Extras on Excise” blog series covers current excise tax developments and highlights states’ reactions to changes in the law that affect excise taxes and fees. Rebecca is a State Tax Law Editor with Bloomberg BNA, where she writes articles for the Weekly State Tax Report, works on developing new products, and maintains various Bloomberg BNA portfolios, navigators, nexus evaluators, and surveys. She holds a B.A. from Miami University in Oxford, Ohio, and a J.D. cum laude from the David A. Clarke School of Law of The University of the District of Columbia. Rebecca can be reached at @RebeccaHelmes.

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