The Washington, D.C. Office of Tax and Revenue recently published guidance on how the Transfer Tax on Real Property (“D.C. Transfer Tax”) and Recordation Tax on Deeds (“D.C. Recordation Tax”, and collectively with the D.C. Transfer Tax, the “Tax”) apply when a lease for real property located within Washington, D.C. is assigned to a third party. OTR Tax Notice 2024-02 states that a lease assignment is taxable in the same manner as it would have been if the parties entered into a new lease for the underlying real property.

Washington, D.C. Taxation of Leases Generally

A lease with a term of at least 30 years (including renewals) is subject to the Tax when created, assigned or transferred. The tax base for the Tax is rent due under the lease (i.e., the consideration for the lease) and any other consideration paid that is not considered rent (referred to as “additional consideration”). The total Tax rate for commercial properties is 2.9% (comprised of 1.45% tax rates for each of the D.C. Transfer Tax and the D.C. Recordation Tax). If a lease term is less than 30 years, then neither the D.C. Transfer Tax nor the D.C. Recordation Tax applies.

Computation of Tax Base

Computation of the Tax base depends on the information available in a lease.

Available Average Annual Rent

When average annual rent (“AAR”) is ascertainable under a lease, the tax base is calculated using the AAR for the full lease term (including renewals), capitalized at a rate of 10%. Any additional consideration is also included in the tax base. However, the tax base is capped at the fair market value of the property.

Unavailable or Unclear Average Annual Rent

When the AAR is unclear under a lease, the tax base is the greater of:

1. 105% of the minimum AAR ascertainable from the terms of the lease, capitalized at a rate of 10%, plus any additional consideration; or
2. 150% of the assessed value of real property covered by the leasehold interest transferred.

Nominal Consideration

When consideration under a lease is nominal, the tax base is the fair market value of real property covered by the lease.

Application to Lease Assignments

When a lease is assigned and has a remaining term of at least 30 years, the assignment is subject to the Tax. Taxpayers considering such a lease assignment should consult a tax advisor on the potential Tax exposure to optimize transaction structuring and to ensure compliance with Tax obligations.