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Tuesday, October 31, 2017

City of Chicago Can Impose Real Estate Transfer Tax on Fannie Mae/Freddie Mac Transactions

The Seventh Circuit Court of Appeals just ruled that state and local taxing bodies can impose real estate transfer taxes on real estate transactions involving Fannie Mae and Freddie Mac. Federal National Mortgage Ass'n v. City of Chicago (7th Cir. Oct. 30, 2017)

The City of Chicago imposes a real estate transfer tax on the transfer of real property within the City. The obligation to pay the tax is on the buyer, not the seller. Chicago also imposes a "supplemental tax" that is paid by the seller unless the seller is exempt under state or federal law, and then it is imposed on the buyer. 

Buyers sued the City of Chicago after the real estate transfer tax was imposed on their purchase of property from Fannie Mae or Freddie Mac. They (and Fannie Mae and Freddie Mac) argued that they were not subject to the tax because Fannie Mae and Freddie Mac were exempt from taxation, so the real estate tax was preempted by federal exemption statutes. The district court agreed with the buyers, but the Seventh Circuit ruled against the buyers and Fannie Mae/Freddie Mac.

The Seventh Circuit rejected the buyers argument that the Supremacy Clause of the U.S. Constitution (providing that any state law that conflicts with federal law is not effective) applied and the real estate transfer tax was preempted by the federal tax exemption provisions. Although the federal statutes do exempt federal entities from local and state taxation, they do not exempt the parties who transact with exempt entities. In this case, the real estate property tax imposed by the City of Chicago was imposed on the buyers (private parties) and not on the sellers (federal agencies), so the federal tax exemption did not apply to the transaction. As a result, the Seventh Circuit held that the City of Chicago was not barred from collecting the real estate taxes from the buyers in these transactions.

Post Authored by Julie Tappendorf


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