Real Estate Excise Tax Developments– Posted by Andrew R. Goodrich
Several recently released cases from the Washington Department of Revenue Administrative Review and Hearings Division provide a good reminder about the reach of the department to collect real estate excise tax (REET) on the transfer of real property.
In the first case (Det. No. 16-0350), the petitioner limited liability company transferred a controlling interest in an LLC holding real property, but asserted that the transfer of interest was a gift because there was no change in the parties responsible for the debt on the property or in the source of funds used to make mortgage payments. Specifically, interests owned by a father and mother along with their daughter were transferred solely to the daughter, who continued to make mortgage payments just as she had been doing prior to the transfer. However, the Department of Revenue denied the petition, arguing that even though the parents transferred their interests in the LLC as a gift, because the daughter was not the sole beneficiary of the LLC bank account, from which funds were taken to pay down the debt (on which the parents remained liable), they obtained a type of consideration for the transfer. Consequently, it was not a gift, and so was not exempt from REET requirements.
This case is a great example of how aggressive the Department of Revenue has become in denying taxpayer relief under statutory REET exemptions.
In the second case (Det. No. 16-0289), a 50% owner of the petitioner limited liability company transferred his interest to the other 50% owner, but only paid REET based on a selling price equivalent to 50% of the outstanding mortgage on the property owned by the LLC. While he later conceded that this was not the appropriate way to calculate the selling price for purposes of REET, he argued that as he only purchased 50% of the LLC interests, REET should be calculated based on 50% of the value of the real property owned by the LLC. His petition was denied in this respect, with the Department of Revenue arguing successfully that state law is very clear that a transfer of 49% or less of an LLC owning real property triggers no REET, while a transfer of 50% or more of the same LLC triggers REET on 100% of the real estate owned by the LLC. When the real property is owned by an LLC rather than personally, “the value taxed is not the consideration paid, but the value of the real estate owned by the entity.” McFreeze Corp. v. Dep’t of Revenue, 102 Wn. App. 201 (2000).
The underlying law in this case is not new, but taxpayers continue to either misunderstand or be unaware of the way the Department of Revenue calculates REET for real property held by LLCs. With the complex REET rules and increasingly aggressive enforcement, property owners would be well-served to speak with the real estate professionals at Lasher Holzapfel Sperry & Ebberson in connection with a transfer of property.