DC Recordation and Transfer Taxes Skyrocketing for Commercial Properties

As has been announced, the cost of real estate transactions involving commercial property located in the District of Columbia will increase significantly as of October 1, 2019, but not necessarily for multifamily properties. On July 22, 2019, the D.C. City Council adopted Bill 23-209 “to enact and amend provisions of law necessary to support the Fiscal Year 2020 budget” (the “Bill”) which budget was approved pursuant to the Fiscal Year 2020 Local Budget Act of 2019. The Bill, which is subject to congressional approval, includes an increase in the transfer tax and recordation tax on certain commercial real estate transactions valued over $2,000,000 from a combined 2.9 percent (1.45 percent each) to a combined 5 percent (2.5 percent each). The increase also applies to a transfer of economic interests in real estate.

 

What has not been broadcast generally is that the provisions of the Bill relating to the transfer and recordation tax increases apply only to “Class 2” properties and other properties “if any portion of the building or structure in which the real property (or interest in real property) being transferred is classified as Class 2 Property”. Residential property, including multifamily residential, is not classified as a “Class 2” property. Consequently, a multifamily residential project that does not include any commercial uses (e.g., dry cleaner, day care, eatery, coffee shop, etc.) will not be subject to the tax increases. The question of what constitutes a “portion of the building or structure” for purposes of the Bill has not been resolved. The D.C. Recorder’s Office has promised “guidance” on this question in the near future.