Assignment of mortgage not a transfer of a “beneficial interest” in real property to trigger tax assessment under Chicago transfer tax ordinance.

In City of Chicago v. Elm State Prop. LLC, 2016 IL App (1st) 152552 (Dec. 22, 2016) the First District Appellate Court of Illinois held that the assignment of mortgage loan was not a transfer of a “beneficial interest” in real property triggering a transfer tax assessment under the Chicago Real Property Transfer Tax Ordinance. The defendants purchased defaulted loans secured by mortgages on Chicago property. The city subsequently assessed a tax on the assignments of the mortgages alleging that an assignment of a mortgage was an assignment of a beneficial interest in real property under the ordinance. On appeal from an adverse ruling for the defendants, the appellate court disagreed with the City’s position observing that the term “beneficial interest” generally relates to the party having ownership control over the property. The holder of a beneficial interest is the effective owner of the property even though it does not possess legal title. Mortgages, by contrast, do not convey equitable ownership but merely a lien on the property. The court rejected the City’s novel argument based on an inapplicable interpretation of the ordinance. It lists three examples of what constitutes a “beneficial interest” and the City argued that the mortgages are such interests by virtue of the “including but not limited to” language of the ordinance. The court held that for that interpretation to apply a mortgage interest has to be of the same kind as the listed examples of ownership. It is not. The others are all forms of ownership of the property, not lien interests. The court also rejected the City’s argument that because the loans were in default at the time of the assignments, the assignments conveyed a beneficial interest due to the mortgagee’s ability to collect rents and take possession upon foreclosure. An assignment of rents is simply another form of security and the mortgagee still must acquire title before collecting rents again demonstrating the lack of control defendants had with simply a mortgage interest in the property.

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