from Local Attorney, Michael H. Wasserman

Tuesday, June 22, 2010

Keep your eye on Chicago City Council

Is the City of Chicago preparing  to start taxing foreclosures?

@ Properties agent Robert Darrow of @ Properties posted an interesting piece yesterday on his always informative blog, suggesting that very thing, Apparently, 26th ward Alderman Roberto Maldonado has  introduced proposed legislation to the City Council, assessing the transfer tax on bank acquisitions of foreclosed properties.  There is not much other information on the internets to flesh this story out, so it may be a bit premature to take sides on this one. What the heck, here is my take so far:

A Brief History of the Transfer Tax
The City collects a transfer taxes on most all real estate transactions, currently set at $5.25 per $500 of sales price. The tax is projected to bring $57.0 million into City coffers for 2010, roughly 4.5% of all City tax revenue. The tax grew out of the State of Illinois' grant of home-rule authority to cities and villages in 1970. Since then, the tax was expanded broadly back in 2005 to add new "types" of real estate transactions. In 2008, the tax rate was increased by 40%, when the City added a seller-paid levy of $1.50 for every $500 of the sales price to then existing $3.75 per $500 that buyers pay. At the peak of the real estate boom, transfer taxes brought in a whopping $242.3 million in revenue.

The City's Dogged Pursuit of Tax Collection 
As with many other critical yet shrinking revenue streams, the city has been doggedly pursuing enforcement of the tax ordinance, deploying teams from the Department of Revenue and Law Department to scour transaction records and search for unpaid, underpaid and late-paid  taxes (together with applicable  late fees and penalties). Most notable of the collection efforts have been efforts targeted against title companies who are occasionally slow to record deeds / pay the transfers taxes (which are due at the time of sale, not time of recording) and divorcing couples that record deeds to transfer title to from the couple to a single (former) spouse. To put the aggressiveness of the campaign in proper perspective, I have seen and heard of inquiries regarding four and five year old transactions. They are looking that far back,

Not All Transactions are Taxable
Certain types of property transfers remain tax free. The declaration form taxpayers must file when making the tax payment lists re are thirteen (13) specific types of real estate transfers that are exempt from taxation. Exemption "M" frees mortgage lenders of the tax obligation when acquiring title from their defaulting borrowers. If Bob Darrow's report is correct, it looks to me like the City is trying to remove the exemption.

Leave it to the economists, appraisers, and real estate sales agents to say how this will actually effect the markets. Banks that  incur the new cost of acquiring properties through foreclosure will surely want to recoup those costs at the time of sale in the way of higher asking prices. That may narrow the asking price ranges between REO and non-REO markets, but ultimately, I suppose it will buyers that decide whether lender "desires" will warrant higher purchase offers. I just do not see REO buyers caring even a little about the relative degree of loss banks suffer as a result of the likely City Council action.

What do you think?