When a Virginia deed of trust secures more debt than the property is worth, does the clerk calculate recordation tax on the debt or on the property's fair market value?

Plain-English summary

Henrico County's circuit court clerk faced a conflict between the Code and the Virginia Administrative Code on how to calculate the recordation tax on deeds of trust. The Code, § 58.1-803(A), imposes the recordation tax at 25 cents per $100 of "the amount of bonds or other obligations secured" by the deed of trust. It then provides that "[i]n any case in which the amount which may be secured under a deed of trust or mortgage is not ascertainable, the tax shall be based upon the fair market value of the property conveyed, determined as of the date of the deed of trust or mortgage." A Tax Commissioner regulation (23 VAC § 10-320-40(A)(1)) and a Tax Commissioner Ruling, however, said that when real estate worth $30,000 secured a $160,000 note, the tax should be based on the value of the real estate, not the note.

The AG sided with the Code. The statute is plain: when the secured amount is ascertainable, the tax is on that amount. Fair market value comes in only when the secured amount cannot be determined. The regulation's example (and the underlying Ruling) was inconsistent with the statute and could not override it. The AG cited prior opinions reaching the same conclusion in the lines-of-credit and partial-secured-loan contexts. The purpose of the recordation tax also supported this reading: it is a tax on a civil privilege (the privilege of using the registry), measured by the amount being protected by recordation, not by the value of the collateral that happens to back the obligation.

Currency note

This opinion was issued in 2011. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

What's the recordation tax rate?
Twenty-five cents per $100 (or fraction thereof) of the amount of bonds or other obligations secured by the deed of trust or mortgage (§ 58.1-803(A)).

What if the loan is $160,000 but the property is worth $30,000?
The tax is based on $160,000, the secured debt, because that amount is ascertainable. The regulation's contrary example was inconsistent with the statute.

When does fair market value matter?
Only when the secured amount cannot be determined from the face of the instrument. That was the AG's reading of the statute's narrow fallback clause.

Why is the tax based on the secured amount rather than the property value?
Because the recordation tax is on a civil privilege, the privilege of using Virginia's recordation system to protect a claim against competing titles or rights. The amount being protected is the secured debt, so the tax measures that.

Could the Tax Department fix this with a new regulation?
Section 58.1-203(A) requires Tax Department regulations to be consistent with the Code. A regulation cannot override the statute. The example in 23 VAC § 10-320-40(A)(1) needed to be corrected to match § 58.1-803(A).

Background and statutory framework

Section 58.1-803(A) imposes the recordation tax at 25 cents per $100 of the amount secured by the deed of trust, with fair-market-value as a fallback only when the secured amount is not ascertainable. Section 58.1-203(A) gives the Tax Commissioner authority to promulgate regulations, but they "shall not be inconsistent with the Constitutions and applicable laws of this Commonwealth and of the United States."

The Commissioner's regulation describes the tax as one on a civil privilege, measured by consideration or fair market value (whichever is greater) and the amount of secured bonds or obligations. A separate regulation, 23 VAC § 10-320-40, includes an example saying that real estate worth less than the secured note results in tax measured by the property value. The AG said this example is inconsistent with § 58.1-803(A) and cannot be applied. The opinion noted that other provisions of the statute support its reading.

The purpose of the recordation tax is the privilege of using the registration system. The Recording Act provides that a recorded deed takes priority over any unrecorded deed and any deed subsequently recorded; recording perfects an instrument against competing claims of title or right and against subsequent purchasers and creditors. The point of recording is to protect a claim, so the tax measures what is being protected.

Citations

• Va. Code § 2.2-505 (authority for the advisory opinion)
• Va. Code § 58.1-803(A) (recordation tax based on amount secured)
• Va. Code § 58.1-203(A) (regulations cannot conflict with statute)
• 23 Va. Admin. Code § 10-320-40 (example the AG found inconsistent with the statute)

Source

• Landing page: https://www.oag.state.va.us/annual-reports-opinions/official-opinions
• Original PDF: https://www.oag.state.va.us/files/Opinions/2011/11-073-Smith.pdf

Original opinion text

COMMONWEALTH of VIRGINIA
Office of the Attorney General
Kenneth T. Cuccinelli, II

May 27, 2011

Attorney General

The Honorable Yvonne G. Smith
Clerk of the Circuit Court of Henrico County
Post Office Box 90775
Henrico, Virginia 23273-0775

900 East Main Street
Richmond, Virginia 23219
804-786-2071
FAX 804-786-1991
Virginia Relay Services
800-828-1120
7-1-1

Dear Ms. Smith:
I am responding to your request for an official advisory opinion in accordance with § 2.2-505 of the Code of Virginia.

Issue Presented
You inquire, in light of an apparent conflict between the Code of Virginia and the Virginia Administrative Code, how to calculate the recordation tax on deeds of trust when the amount secured under the deed is greater than the fair market value of the property subject to the deed.

Response
It is my opinion that, when the amount secured by a deed of trust is known, the Clerk of Court should calculate the recordation tax based on the amount of indebtedness rather than the fair market value of the encumbered property.

Applicable Law and Discussion
Section 58.1-803(A) of the Code of Virginia provides that

A recordation tax on deeds of trust or mortgages is hereby imposed at the rate of 25 cents on every $100 or portion thereof of the amount of bonds or other obligations secured thereby ... . In any case in which the amount which may be secured under a deed of trust or mortgage is not ascertainable, the tax shall be based upon the fair market value of the property conveyed, determined as of the date of the deed of trust or mortgage.

Section 58.1-203(A) provides:

The Tax Commissioner shall have the power to issue regulations relating to the interpretation and enforcement of the laws of this Commonwealth governing taxes administered by the Department. Such regulations shall not be inconsistent with the Constitutions and applicable laws of this Commonwealth and of the United States.

Pursuant to this authority, the Commissioner has promulgated that

The recordation tax is not a tax on property but on a civil privilege, i.e., the privilege of utilizing the registration laws of Virginia. The tax is generally measured by the consideration or actual (fair market) value of the property transferred, whichever is greater, and the amount of bonds or other obligations secured by deeds of trust or mortgages.

The regulations also provide the following illustration:

A. Examples of deeds of trust, mortgages and supplemental indentures taxable under § 58.1-803 of the Code of Virginia:

1. A deed of trust secured by real estate with a lesser value than the note. For example, if real estate valued at $30,000 secures a note of $160,000, the tax is based upon the value of the real estate.

Applying these regulations, the Tax Commissioner has opined that:

The [recordation] tax is not imposed on the total amount of the bonds or other obligations described in a deed of trust, but on the amount that is secured by the property conveyed. Therefore, the amount secured by a recorded deed of trust can never be more than the fair market value of the property described and conveyed by the deed. The tax will be limited to the fair market value of the property conveyed whenever the amount of the bonds or other obligations exceeds the value of the property conveyed.

When a statute is unambiguous on its face, it will be interpreted according to its plain language. The plain language of § 58.1-803(A) states in its opening sentence that the recordation tax on deeds of trust shall be imposed on "the amount of bonds or other obligations secured thereby." "Secured thereby" means "secured by the deed of trust." The statute allows for levying the recordation tax based on the fair market value of the collateral property legally conveyed to the trustee in situations where the loan amount secured by the deed of trust is not ascertainable. The statute is silent with regard to fair market value where the loan amount is ascertainable. By the express terms of the statute, consideration of fair market value occurs only when the amount of indebtedness is unknown. Other provisions of the statute support this reading.

Moreover, previous opinions of this Office have concluded that "the measure of the recordation tax ... is the amount of the obligation secured[,]" and that "Section 58.1-803(A) provides that the tax shall be assessed on the basis of the fair market value of the property only where the amount of the obligation cannot be ascertained from the face of the instrument." This is so even where the amount of the loan secured is considerably less than the fair market value of the property. Further, where the question presented was whether the tax should be based on the maximum amount authorized under the line of credit or the fair market value of the property, this Office determined that "[t]he proper tax should be based upon the maximum amount for which the owners may be held liable under their guaranty. That maximum is the same maximum amount which is authorized under the line of credit line and not the fair market value of the property conveyed."

The underlying purpose of the statute confirms that the recordation tax is ordinarily to be based on the amount stated in the obligations that are secured, not the fair market value of the property. "The recordation tax is not a tax on property ... but a tax on a civil privilege[,]" i.e., the privilege of utilizing the registration laws of Virginia. The Recording Act provides that a recorded deed takes priority over any unrecorded deed and any deed subsequently recorded. Recording is required for one reason only: to perfect an instrument against claims of competing title or right by those claiming an interest through an unrecorded instrument and by subsequent purchasers and creditors. Therefore, the statute logically provides for the tax to be based on the amount being protected by the recordation when that amount is ascertainable, rather than on the initial (and often fluctuating) fair market value of the property that is used as collateral.

I therefore conclude that the example provided in Title 23, § 10-320-40(A)(1) of the Administrative Code is inconsistent with the plain language of Virginia Code § 58.1-803, so that when the amount secured by a deed of trust is known, the recordation tax is to be based on that amount rather than the fair market value of the collateral.

Conclusion

Accordingly, it is my opinion that, when the amount secured by a deed of trust is known, the Clerk of Court should calculate the recordation tax based on the amount of indebtedness rather than the fair market value of the encumbered property.

With kindest regards, I am

Kenneth T. Cuccinelli, II
Attorney General