Update: On December 22, 2016, the Illinois appellate court overturned the circuit court's consolidated ruling imposing a transfer tax on mortgage assignments in City of Chicago v. Elm State Property (). The appellate court held that the history and legislative intent behind the real estate transfer tax ordinance did not intend for transfer taxes to be imposed on mortgage interests.

The Circuit Court of Cook County recently decided two sets of consolidated cases of first impression to determine if an assignment of a mortgage was exempt from Chicago's real property transfer tax ordinance under Chicago Municipal Code Section 3-33-060.

The first set of cases were decided on August 6, 2015:

The second set of cases were decided on August 11, 2015:

The facts of each case follow a similar pattern. In each case, a borrower obtained a mortgage loan secured by real property located in Chicago. After the borrower defaulted on the mortgage, the lender sought to sell the mortgage indebtedness. A taxpayer purchased the indebtedness and received an assignment of the mortgage from the lender. The borrower also granted the taxpayer a deed in lieu of foreclosure.

Chicago Municipal Code Section 3-33-030 imposes a tax on transfer of title to, or a beneficial interest in, real property located in Chicago. No definition of beneficial interest is included in the ordinance, but section 3-33-020 provides a list of examples of beneficial interests, including only:

Section 3-33-060 provides a list of exemptions from the transfer tax. Exemption C allows an exemption for transfers in which the deed, assignment or other instrument secures debt or other obligations.

In these cases, the Chicago Department of Finance denied the exemptions and issued tax assessments on the transfers. The Department claimed that the assignments were beneficial interests in real property that did not secure debt and were not entitled to Exemption C.

While these cases were pending, the City Comptroller adopted Real Property Transfer Tax Ruling #4, which states that when a bona fide lender acquires a mortgage on property owned by a person to whom the lender lends money, the lender acquires a beneficial interest in the real property through the mortgage. Ruling #4 also states that Exemption C is not meant to apply to transactions where a non-lender takes an assignment for the main purpose of acquiring the subject real property.

The court noted that in giving meaning to the words and clauses of a statute, no part of the statute should be rendered superfluous. If a mortgage is not a beneficial interest in real property, then Exemption C would be superfluous because the mortgage would not be taxable under Section 3-33-030 in the first place. To avoid rendering Exemption C superfluous, the court interpreted that a mortgage lien must be taxable when transferred or assigned.

The court pointed out that the definition of beneficial interest is not limited to the examples listed in the statute. In the second set of cases, the court specifically noted that the mortgage lien and any rights to collect rents or enter the property for the protection of the mortgagee's security interest are beneficial interests in real property.

The court further distinguished between obtaining a mortgage and assigning a mortgage. A mortgage secures debt by granting a lien on real property, but an assignment of a mortgage merely transfers an instrument that secures debt. An assignment may transfer rights, but the assignment itself does not secure debt, so it does not qualify for Exemption C.

In the first set of cases, the assignments conveyed immediate possession of the real property because the borrowers simultaneously granted the taxpayers deeds in lieu foreclosure. Accordingly, the mortgage assignments did not secure a debt.

In the second set of cases, the court did not address that the taxpayers received the deeds in lieu of foreclosure several months after the mortgages were assigned. However, the court followed the same line of reasoning as the first set of cases.

It is clear that Chicago intended to expand the scope of its transfer tax ordinance, but the ruling by the appellate court demonstrates that the court system is still hesitant to impose a transfer tax on mortgage assignments. Counsel should be aware that while mortgage assignments are not currently subject to mortgage tax in Chicago, future developments in this matter are likely.

For a state-by-state overview of the taxes levied on the transfer of real property, see State Transfer Tax Comparison Chart.

For more information about state, county, and municipal real estate transfer taxes in Illinois, see Practice Notes: