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Fannie Mae: Chicago can't collect transfer taxes on foreclosed properties sold by federal agencies

By Jonathan Bilyk | Oct 15, 2015

Fannie Mae, the federally-controlled largest provider of funding for mortgage loans in the country, has sued the city of Chicago in federal court to ask a judge to halt the city’s efforts to collect real estate transfer taxes on the residential properties the agency sells.

On Oct. 15, the Federal National Mortgage Association, commonly known as Fannie Mae, and the Federal Housing Finance Agency, the federal agency which oversees Fannie, filed its complaint in federal court in Chicago against the city, alleging Chicago has violated federal law when it hits people and investors buying properties sold by Fannie Mae with its real estate transfer tax.

“Given the breadth of the federal statutes exempting the (federal) Enterprises from ‘all [state and local] taxation,’ and U.S. Supreme Court precedent establishing that similarly worded exemptions cover the exempt entity’s transactions regardless of the party purportedly liable for an excise tax, the City cannot lawfully impose excise taxes on an Enterprise’s sale of real property or collect such taxes from any party to such a transaction,” Fannie Mae said in its complaint. “Yet, that is what the City and its officials purport to do.”

Fannie Mae centered its complaint on the approximately $2,600-$3,200 in real estate transfer taxes applied by the city to several purchases of foreclosed properties “liquidated” by Fannie Mae in sales to “third party purchasers.”

According to the complaint, when a property is sold in Chicago, the city routinely seeks to collect taxes equivalent to 3.75 percent of every $500 of the property’s assessed value, plus an additional special tax for the Chicago Transit Authority of 1.5 percent per $500 assessed value. The transfer tax is typically paid by the buyer at the time the title to the property is transferred from the seller to the new owner.

Such taxes are a money maker for the city. According to the city’s 2015 budget, City Hall expects to collect 9 percent of its annual revenue, or about $326 million, from transaction taxes, which include the real estate transfer tax, as well as taxes on property leases and rented vehicles.

In this case, the city assessed a tax on the transfer of foreclosed homes in the 5000 block of West Hutchinson Street, in the city’s Portage Park neighborhood; in the 2900 block of North Sacramento Boulevard in Logan Square; in the 6900 block of West Wolfram Street in the Montclare neighborhood; and in the 1100 block of West Maple Street in the Near North Side.

Fannie Mae asserted in its complaint each of the buyers of those foreclosed homes did not pay the assessements and challenged them through the city’s administrative review processes. However, in each case, the complaint said the city’s administrative law judge and other officials determined each of the property buyers owed the city the taxes.

Fannie Mae, however, has asserted this tax collection flies in the face of both federal law and legal precedent, which exempts both Fannie Mae and the buyers of its properties from such local government taxation.

Federal law carves out an exemption for the city to collect property taxes on the homes. But the transfer tax is a “transaction-based local excise tax,” and not a tax on the property itself, the complaint argued.

“As the Supreme Court has held, ‘regardless of who pays’ the taxes on a transaction, its ‘necessary effect’ is the same: to tax the transactions and ‘to increase the cost’ to the exempt entities, thereby constituting a tax that is preempted by federal law,” Fannie Mae said in its complaint.

Fannie Mae has asked the court to determine and declare neither it nor those who buy foreclosed properties from it in Chicago are required to pay the transfer tax, and the city cannot attempt to collect these taxes any longer from those buying homes sold by Fannie Mae.

Fannie Mae and the FHFA are represented in the action by attorneys with the firms of Arnold & Porter, of Washington, D.C., and Honigman Miller Schwartz and Cohn, of Chicago, as well as in-house staff counsel.

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Organizations in this Story

Arnold & Porter LLP Chicago Transit Authority City of Chicago Federal National Mortgage Association Honigman Miller Schwartz and Cohn LLP U.S. Federal Housing Finance Agency

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