A CPA recently asked North City Law “What sale price do I put on the Washington State Real Estate Excise Tax Affidavit?” The taxpayer changed the legal title of a property from his name into the name of his single-member LLC, and needed to report the transfer to the Washington State Department of Revenue to satisfy real estate excise tax requirements. It was a great question because the Washington real estate excise tax is so common for individuals flipping houses and holding investment property.
In response, we prepared this guide with general information with tips for navigating the Washington State real estate excise tax and outline some of its most important features, including special situations in which the tax is payable (transfers of controlling interests) and avoidable (mere changes in identity or form).
In general, Washington State applies an excise tax to all sales of real estate. The tax is a percentage of the selling price equal to 1.28% plus an additional local rate based upon the location of the property. Local rates usually vary from 0% to 0.75%, and can range as high as 1.50% in some locations such as San Juan county. The Washington State Department of Revenue provides online a rate schedule that is revised quarterly, as well as fillable forms that will automatically calculate your tax due based upon the information provided.
The tax and a Real Estate Excise Tax Affidavit, signed by both the buyer and seller, are both due at the time of sale, to be submitted to the County Treasurer’s Office where the property is located. By law, the tax is placed on the seller, but the buyer and seller often negotiate the cost as part of the transaction.
What is the Sales Price?
In a standard commercial transaction between unrelated parties, a rebuttable presumption exists that the selling price is equal to the total consideration paid or contracted to be paid for the property. The total consideration includes any money, anything else of value provided, as well as any debt the buyer takes on or remains on the property at the time of sale.
In circumstances where there is not a direct purchase, the selling price is the ‘true and fair value of the real property,’ determined by either a fair market appraisal or an allocation made pursuant to section 1060 of the Internal Revenue Code. If either of those methods is not reasonably available, the market value assessment for the property maintained on the county property tax rolls may be utilized.
Sales Include Transfers of Controlling Interests in Property-Holding Entities
In addition to standard sales, the Washington State real estate excise tax applies to any transfer of a controlling interest in an entity that holds real property. For a transfer of a controlling interest, the seller will submit a ‘Real Estate Excise Tax Affidavit Controlling Interest Transfer Return’ directly to the Washington State Department of Revenue at the time of the transfer of interest, at the same rates as with a standard sale.
A transfer of a controlling interest is any transfer of 50% or more of the capital, profits, or beneficial interest in the entity (which may be a corporation, partnership, LLC, etc.). In the case of a corporation, a transfer of 50% or more of the voting power also qualifies. The Washington State Department of Revenue applies several guidelines to determine whether a transfer of a controlling interest occurred, including aggregating related parties and individuals working in concert, as well as looking through intermediate companies to see the beneficial interests of parent companies and owners in subsidiary companies that hold real estate. All transactions over a 12-month period will be considered together when determining whether a transfer of a controlling interest occurred.
Sales Do Not Include Mere Changes in Identity or Form
There are several special cases in which a sale or transfer is exempt from the real estate excise tax, one of the most important being transfers that consist of a mere change in identity or form of ownership with no change in beneficial ownership.
A simple example of a mere change in identity or form would be an individual transferring real estate to a wholly-owned LLC holding company. Despite the change in structure (i.e., interposing a holding company between the owner and the property), the owner retains the same 100% beneficial ownership in the real estate after the transaction.
In the case of a mere change in identity or form, the buyer and seller would complete the appropriate affidavit but list the selling price as $0, citing the appropriate exemption rule and attaching all documentation required by the Department of Revenue.
Interest, Penalties, and Audits
The excise tax and appropriate affidavit are due at the time of the sale or transfer, prior to any documents being recorded by the county auditor. If the tax is not paid within one month of the date of sale or transfer, interest and penalties will apply. The interest rate is variable and set to the federal short-term rate plus two percentage points. Penalties can reach as high as 20% for payments that are three or more months late.
The Department of Revenue audits most transactions where an affidavit is filed, especially when the selling price of the property is less than the assessed value. It is important to be complete and accurate when submitting the required affidavit, and to keep any records pertaining to the sale or transfer for the length of the statute of limitations (4 years).