Did Virginia accept a taxpayer's appraisal and order a recordation-tax refund for land conveyed subject to a leasehold interest?

Subject

County clerk had to reconsider fair market value for recordation tax

Plain-English summary

Virginia did not adopt a final value or order an immediate refund. The taxpayer bought land subject to a leasehold, and the county calculated state and local recordation taxes and a regional congestion relief fee from the county's assessed fair market value. The taxpayer argued for a lower value supported by an appraisal.

For recordation tax, "actual value" meant fair market value, not the special use value used to reduce local real-property tax on qualifying open-space or similar land. The county's assessed fair market value carried a strong presumption of accuracy, but a circuit-court clerk could consider clear and convincing reliable evidence that the assessment did not reflect current market value.

The appraisal used a market-value definition consistent with the cited Virginia cases and considered the land's highest and best use. The Commissioner did not validate its conclusion, because final valuation was a factual question for the local clerk.

Result: the clerk was asked to reconsider the value of the unimproved underlying land using the appraisal and all other reliable information. The leasehold interest had to be excluded when computing the grantor's tax and regional fee. Virginia would adjust the state taxes and fee, and the county would handle the local refund, only if the revised values warranted relief.

What this means for you

• Recordation-tax actual value is fair market value, not a preferential land-use assessment.
• A real-estate assessment is strong evidence but is not automatically conclusive.
• A competing appraisal should address current fair market value and the uses to which the land is reasonably susceptible.
• Identify leaseholds and other encumbrances when calculating taxes that exclude their value.

Common questions

Q: Did the Department accept the taxpayer's appraisal value?

A: No. It found the appraisal relevant but left the final factual valuation to the county clerk.

Q: Was the taxpayer guaranteed a refund?

A: No. Refunds depended on the clerk's revised values. Virginia would handle the state taxes and regional fee, while the county would handle any local recordation-tax refund.

Q: Why was the county's open-space use value insufficient?

A: That preferential value applied to local real-property tax, not to state and local recordation taxes.

Citations and references

• Va. Code §§ 58.1-801, 58.1-802, 58.1-802.2, 58.1-814, 58.1-3230, and 58.1-3231.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-211

Original ruling text

November 10, 2015

Re: § 58.1-1821 Application: Recordation Tax

Dear *:

This will reply to your letter in which you request a refund of the state and local recordation taxes paid by * (the "Taxpayer"), for recording a deed.

FACTS

The Taxpayer purchased property subject to a leasehold interest. The sale included the underlying land but no improvements. In January 2015, the Taxpayer presented a deed for recordation to the Clerk of the Circuit Court of * (the "County"). The County assessed recordation tax, including a regional congestion relief fee (RCRF), based on the assessed fair market value of the land, which was greater than the consideration for the conveyance of the real property interest.

Pursuant to a separate written agreement with the seller, the Taxpayer paid all recordation taxes and fees. The Taxpayer filed a claim for refund, contending that the state and local recordation taxes should have been based on the value of the underlying land as determined by the Taxpayer's appraisal.

DETERMINATION

Virginia Code § 58.1-800 et seq. , imposes the state tax on the recordation of documents relating to real estate transactions. A recordation tax is imposed on any instrument admitted to record unless otherwise exempt by statute. Under Va. Code § 58.1-801, a state recordation tax is imposed on deeds at a rate of 25¢ on every $100 or fraction thereof of the consideration or the actual value of the property conveyed, whichever is greater. Virginia Code § 58.1-802 imposes an additional grantor's tax of 50¢ on every $500 or fraction thereof, exclusive of any lien or encumbrance remaining thereon at the time of the sale, on the greater of the actual value of the property conveyed or the consideration of the sale. Any city or county may impose a recordation tax equal to 1/3 of the amount of state recordation tax. See Va. Code § 58.1-814. In addition, the RCRF is dedicated to fund transportation improvements and imposed and collected in the form of a recordation tax pursuant to Va. Code § 58.1-802.2. See Op. Att'y Gen. 13-069 (9/20/2013). It is assessed in the same manner as the grantor's tax, at a rate of 150 on every $100 or fraction thereof.

An encumbrance is "a claim or liability that is attached to property or some other right and that may lessen its value, such as a lien or mortgage; any property right that is not an ownership interest." Black's Law Dictionary 568 (8th ed. 2004). As a property right that is not an ownership interest, a leasehold interest is an encumbrance.

The Taxpayer contends that the actual value of property for recordation tax purposes is its value at its current use, not its highest and best use. The Taxpayer asserts that the County's assessed use value, which was lower than the assessed fair market value, was more indicative of the land's actual value. The Taxpayer, however, ultimately asks that the Department accept the fair market value as determined by an appraisal, an amount which was higher than the County's assessed use value but lower than the assessed fair market value.

For recordation tax purposes, actual value is synonymous with fair market value. See 1984-85 Va. Op. Atty. Gen. 378. The Virginia Supreme Court has defined fair market value as the price negotiated by a seller under no obligation to sell and a buyer under no obligation to buy. See id. , citing Tuckahoe Woman's Club v. City of Richmond , 199 Va. 734, 101 S.E.2d 571 (1958). In addition, the market value of land is determined by considering the various uses to which the land is susceptible, not just the uses to which a particular owner may be restricted. See Fairfax County Park Authority v. Virginia Department of Transportation , 247 Va. 259, 262, 440 S.E.2d 610, 612 (1994). If land is so committed to a particular use, however, that it cannot be put to another use economically, it is appropriate to take the committed use of the land into consideration when determining the market value. Id .

Localities that have adopted a land-use plan may adopt an ordinance to provide for use value taxation and assessment of real estate classified for agricultural, horticultural, forest or open-space use under Va. Code § 58.1-3230. See Va. Code § 58.1-3231. The purpose of use value assessment is to encourage the preservation of land for such uses by alleviating the pressures that force the conversion of such land to more intensive uses and that are attributable in part to assessments at values incompatible with its use and preservation for such purposes. See 1997 Va. Op. Atty. Gen. 196, fn. 5. Use value assessments, therefore, are intended to alleviate the local real property tax burden on lands that are used for agricultural, horticultural, forest or open space purposes, and such assessments are not necessarily based on the highest and best uses. In this case, the County has adopted such an ordinance, and it appears that the land was assigned an assessed use value for open space use on which the local real property tax was based. By statute, however, this relief is specific to the local real property tax and does not apply to state and local recordation taxes under Va. Code § 58.1-800 et seq . Therefore, use value is not synonymous with actual value for recordation tax purposes.

In this case, the County based the recordation taxes instead on the assessed fair market value of the land which was higher than the assessed use value. The assessed value of real estate is accorded a very strong presumption of accuracy in determining fair market value. See Shoosmith Bros., Inc. v. County of Chesterfield , 268 Va. 241, 601 S.E.2d 641 (2004) and Tidewater Psychiatric Institute, Inc. v. Virginia Beach , 256 Va. 136, 501 S.E.2d 761 (1998). A clerk of the circuit court is not required to use the assessed value to the exclusion of other reliable information as to the current fair market value. If it can be shown by clear and cogent evidence why the assessed value does not reflect fair market value as of the date of the transaction, the clerk has the authority to rely on such evidence to determine the proper amount of the recordation tax. See Public Document (P.D.) 00-97 (5/26/2000), P.D. 06-77 (8/23/2006), and P.D. 12-61 (4/27/2012).

The Taxpayer's appraisal assigned a fair market value to the land which was less than the County's assessed fair market value. The appraisal defined market value as "the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus." In the Department's opinion, the appraisal's definition is consistent with Virginia Supreme Court's definition of fair market value in Tuckahoe Woman's Club . In addition, it appears that the appraisal considered the land's highest and best use and concluded that the land, if vacant, would continue to be used as open or recreational space for common use by the residents of the surrounding residential development. Although the Department expresses no opinion concerning the validity of such conclusion, taking into considering the other uses to which the land could be susceptible was necessary to satisfy the standard for determining fair market value set forth by the Court in Fairfax County Park Authority .

Ultimately, placing a value on real estate is entirely a factual determination that is best made by one who is thoroughly familiar with the property itself and local market conditions. This responsibility lies with the Clerk when the value must be determined for recordation tax purposes. See P.D. 91-146 (8/2/1991).

The Department, therefore, will send a copy of this letter to the Clerk of the County and request that the actual value of the underlying land with no improvements be determined, taking into consideration the Taxpayer's appraisal and all other relevant and reliable information available. In addition, the value of the interest conveyed must be determined exclusive of the value of the leasehold interest for purposes of computing the grantor's tax and RCRF. When the County informs the Department of the correct values, the Department will adjust the recordation taxes and RCRF and issue a refund if appropriate. A refund of the local recordation tax would be issued by the County if warranted.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6028410823.M