Real Estate Transfer Tax Applicable to Sales of new Homes to Predetermined Buyers
In Eastbrook Homes, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 299612, April 24, 2012, the real estate transfers of a residential building company that constructed and sold new homes to predetermined buyers were not exempt from the Michigan real estate transfer tax because the buyers' quitclaim deeds could not be construed as only equitable mortgages and the company's quitclaim deeds as only their discharge. Although all the buyers' quitclaim deeds provided strong security to the building company regarding its construction contracts, they also transferred all of the buyers' property rights in a lot or condominium unit that were received through a prior warranty deed to the company.
In this case, a buyer would purchase property from a developer who conveyed a warranty deed of an unimproved lot or condominium unit to the buyer. The buyer in turn would contract with the building company to construct a house or condominium unit. As security for the contract between the building company and the buyer, the building company would require the buyer to quitclaim the property to the company. Once construction was complete and the company was paid the contract price, the company would quitclaim the property back to the buyer. Because the quitclaim deeds were made for the purpose of creating a security interest in the property or discharging a security interest, the company contended that the quitclaim deeds were exempt from the real estate transfer tax. The Department of Treasury contended that the building company acted in a coordinated manner with the developer to sell improved property to its buyers without paying the transfer tax on the improved value of the property.
The Michigan Court of Appeals held that the building company's quitclaim deeds were taxable because they conveyed an interest in the property for consideration beyond just a discharge of a security interest. According to the court, the quitclaim deeds would be taxable even if the building company and the developer were separate entities and the parties intended to create security interests. They would also be taxable even if there were legitimate business reasons to structure the transactions the way they were and if the building company believed the transactions were exempt.