Some real estate investors in the District will one day receive a whopping bill for unpaid speculator taxes. Although the District's speculator tax -- the so-called Residential Real Property Transfer Excise Tax -- became effective on July 13, 1978, recent reports have indicated that few investors have complied with its burdensome requirements.
As with any discussion of tax considerations, this new "anti-speculation" law is highly complex. To complicate matters, this is pioneer legislation. The traditional tests and standards which tax advisors use have not yet been formulated.
D.C. Law 2-91 basically accomplishes three major purposes:
1.The establishment of an excise tax on certain transfers of title to residential property.
2. The obligation to record all deeds.
3. A requirement that "dealers" in residential property be licensed.
Real estate brokers are well advised to determine whether they or their client is a "dealer in residential real property," insofar as there are certain recision rights created by this law.
The speculator tax, according to the legislative history, was enacted to prohibit -- or at least curtail -- speculation in real estate and the practice known as "flipping."
Flipping can best be described as follows: Speculator A signs a contract to purchase residential property for $22,000. Prior to settlement, A sells (flips) the contract to B for $50,000. Actual title never passes to A, but a healthy profit of $28,000 is made. According to the formula, since the holding period was less than six months, and the percentage of gain in column A was 128 percent, there is a 93 percent on the gain -- i.e.; $26,040 -- leaving the investor with only $1,960 for the effort.
Clearly, the D.C. Council was attempting to curb the huge speculator gains which have often been made in real estate transactions.
Failure to file the tax return (a form prepared by the District government) will result in a stiff penalty: 5 percent of the amount of the tax, if the failure is not for more than one month, with an additional 5 percent per month not exceeding 25 percent in all. Failure to pay the tax due will carry an interest surcharge of 3/4 of 1 percent per month from the date due until paid.
There are a number of exemptions from this tax, specifically:
1. If the seller (the transferor) warrants the property for two years, warrants the major appliances for one year, and where the property is approved as meeting the standards of the applicable District regulations;
2. Transfers of principal residence. However, there is a requirement that the transferor actually reside in the property for at least 180 days immediately before the transfer.
3. Foreclosure sales, providing the mortgage lender foreclosing is licensed in the District as a bank or other financial institution.
5. Transfers by will -- and transfers or property containing more than four dwelling units.
Recently the District government has increased its surveillance over the operation of this new law.