ISSUE: For purposes of computing the Massachusetts deeds excise imposed upon the conveyance of real property, may the amount of any mortgage upon the property be deducted from the consideration paid for it?

DISCUSSION: Massachusetts imposes an excise upon the transfer of any deed, instrument or other writing whereby realty is conveyed to a purchaser. G.L. c. 64D, § 1. The excise is based upon the consideration given for the property and applies whenever the consideration, exclusive of the value of any lien or encumbrance remaining on the property, is greater than $100. The tax is paid by the person making or signing the deed and is evidenced by a stamp affixed to it, Id., § 2. The tax is $1.00 for each $500, or fraction, of consideration plus an additional tax of 14% of the tax imposed. Id., § 1.

The deeds excise is imposed upon the entire consideration given for the property except to the extent of any "lien or encumbrance remaining" on it when the sale is consummated. G.L. c. 64D, § 1. Thus no deduction may be made for encumbrances placed on the property at the time of conveyance, but where the property is conveyed subject to existing encumbrances, the amount of the encumbrances is not taxable.

New Mortgage. In the case of a new mortgage, the encumbrance is placed on the property at the time of the conveyance. The new mortgage is , therefore, not a "lien or encumbrance remaining," and may not be deducted. The excise is imposed to the full extent of the consideration paid, including the value of any mortgage given by the mortgagor.

Example 1. Arnold buys a house from Bennet for $150,000 and gives the bank a down payment of $30,000 and a mortgage for the remaining $120,000. The deeds excise is imposed on the full consideration, $150,000 ($150,000/$500 x $1.14 = $342).

Novation. A novation substitutes a new party and discharges one of the original parties to a mortgage by the consent of all three parties. A new mortgage is created with the same terms as the original one; only the parties are changed. Since the mortgage created by a novation is an entirely new one, the encumbrance is placed on the property at the time of the conveyance. This new mortgage is, therefore, not a "lien or encumbrance remaining," and may not be deducted. The excise is computed as in Example 1, above.

Deed in Lieu of Foreclosure. When a bank takes back a deed to property and cancels the mortgage debt in lieu of foreclosure, the liability of the mortgagor on the debt is totally extinguished whether or not any additional money is given for the property. There is thus no "lien or encumbrance remaining" on the property and the consideration is the amount of the mortgage debt cancelled by the bank, plus any additional cash paid to the mortgagor.

Example 2. Mrs. Dalloway falls on hard times and is unable to maintain the mortgage on her house in the Strand. The bank agrees to take the deed to the property in lieu of foreclosure and pay here $25,000 in cash. There is $75,000 remaining on the mortgage. The deeds excise is imposed on $100,000, i.e., the amount of the mortgage debt cancelled plus the cash payment ($100,000/$500 x $1.14 = $228).

"Subject To." Where property is taken "subject to" a mortgage, the purchaser generally pays on the old mortgage note, although he is technically not liable for it; the seller is not released from liability for the note, but may be sued directly. In this instance, then, there is a prior "lien or encumbrance remaining on the property" at the time of sale since the old mortgage continues on the property. The amount of the remaining mortgage may be deducted from the sales price.

Example 3. Dorothea buys a mill on the Floss and agrees to take the property "subject to" a prior mortgage for $150,000. Dorothea pays the bank $100,000 in cash. Here the deeds excise is computed by taking the full consideration and deducting the amount of the mortgage remaining. ($250,000 - $150,000 = $100,000/$500 x $1.14 = $228).

Assumption Where the purchaser assumes a mortgage, the purchaser becomes liable for the mortgage debt by expressly agreeing to pay the note and assume primary liability for it. The seller, however, is still liable on the note as a surety. Since the old mortgage remains on the property, there is a "lien or encumbrance remaining," and the excise is computed as in Example 3, above.

DIRECTIVE: Where a new mortgage is given or there is a novation, the amount of the mortgage debt may not be deducted before calculation of the deeds excise. There is also no deduction where the bank takes back a deed to property in lieu of foreclosure. Where there is an assumption of a prior existing mortgage or property is taken "subject to" such a mortgage, the amount of the mortgage debt is deductible.

REFERENCE: G.L. c. 64D, §§ 1, 2.

/s/Stephen W. Kidder
Stephen W. Kidder
Commissioner of Revenue

December 31, 1988

This Directive represents the official position of the Department of Revenue on the application of the law to the facts as stated. The Department and its personnel will follow this Directive, and taxpayers may rely upon it, unless it is revoked or modified pursuant to 830 CMR 62C.01(5)(e). In applying this Directive, however, the effect of subsequent legislation, regulations, court decisions, Directives, and TIRs must be considered, and Department personnel and taxpayers may rely upon this Directive only if the facts, circumstances and issues presented in other cases are substantially the same as those set forth in this Directive.