The real estate excise tax (REET) is a tax on the sale of real property in the state of Washington. The tax also applies to sales or transfers of controlling interests in entities (e.g., corporations, partnerships, limited liability companies, etc.) that own real property. Here are ten things you should know about the REET:
1. REET Rates. In most cases the REET includes both a state and a local levy. The state tax rate is 1.28%. Local governments can add 0.25% or 0.50% to the state rate, making the most common rates throughout Washington 1.53% or 1.78%. Several jurisdictions impose only the state REET (1.28%). At the other end of the spectrum, there are several jurisdictions that impose REET in excess of 1.78%. Those include San Juan County (2.78%) and the City of Asotin (2.03%). REET rates in the various locations of the state often change (rate changes are generally made at the beginning of a calendar quarter). The current rates are listed at the Department of Revenue’s website.
2. How the REET is Reported. The REET is paid to the treasurer of the county in which the real property is located, EXCEPT in the case of sales or transfers of controlling interests in entities that own real property, in which case the tax is reported to the Department of Revenue in Olympia. The tax is reported and paid on REET “Affidavits” and there are separate affidavits for sales of real estate, transfers of controlling interests, and sales of mobile homes. In addition to the affidavit, some transfers require a Supplemental Statement, which will ask for additional information about the sale/transfer. The Department has fill-in-the-blank REET Affidavits on its website. These forms are easy to complete and automatically calculate the tax. If there is any personal property included in the sale, the value must be deducted so it is not included in the REET calculation, but the sales tax or use tax will have to be paid on any personal property sold in the transaction unless an exemption applies. Once the Affidavit is completed, it can be printed and is ready to be filed with the county treasurer or mailed to the Department of Revenue. Both the seller and buyer are required to sign the Affidavit under penalty of perjury.
3. Exemptions From Tax. The REET contains numerous exemptions from tax. The exemptions can be found in the REET statutes, chapter 82.45 RCW, or in the rules or regulations adopted by the Department of Revenue, chapter 458-61A WAC. It is a good idea to review the rules from time-to-time in order to be fully aware of the exemptions available. The exemptions should also be reviewed to see if one might apply if the transaction is other than a straight sale of real property or controlling interest. If an exemption does apply to the transaction, the REET Affidavit contains a section where the exemption can be claimed. The number of the WAC rule that allows the exemption should be filled in. It is not necessary to provide any further explanation other than to identify the WAC rule that exempts the transaction. It is possible that more than one exemption applies to a transaction. If so, then list the exemption that seems most appropriate.
4. Consideration. The REET applies whenever the transfer is for “consideration.” It follows that a transfer for “no consideration” is not taxable. Consideration means money or anything of value, either tangible or intangible, paid or delivered, or contracted to be paid or delivered, including the performance of services, in return for the transfer of real property. The REET applies to both transfers when two properties are exchanged and there is no exemption when the transaction involves an IRC §1031 exchange. Consideration also includes the amount of any lien, mortgage, indebtedness or other encumbrance given to secure the purchase price or remaining on the property at the time of sale, including the assumption of an underlying debt. A sale where the buyer assumes the underlying debt and pays no additional consideration (e.g., cash) is fully subject to REET.
5. What constitutes the transfer of a “controlling interest” in an entity that owns real property in Washington? In the case of a corporation, a controlling interest is either 50% or more of the total combined voting power of all classes of stock of the corporation entitled to vote, or 50% of the capital, profits, or beneficial interest in the voting stock of the corporation. In the case of a partnership, association, trust, or other entity (such as a LLC), a controlling interest is 50% or more of the capital, profits, or beneficial interest in the entity. Note that the tax applies when exactly one half of the interests are conveyed and the events that trigger a transfer of a controlling interest are in the disjunctive (“or”).
6. The Measure of REET. When real property is sold or conveyed REET is generally calculated on the consideration paid by the buyer to the seller. If the buyer is purchasing a 50% interest in the property, the REET applies to the consideration representing 50% of the value of the property. For example, two parties own a parcel of real property (50% each) as tenants in common. One party wants out and sells his or her 50% share to the co-owner. If the fair market value of the property is $1 million and the selling price is $500,000, REET will be calculated on $500,000. But, in a sale or transfer of a controlling interest, the REET will apply to 100% of the fair market value of the real property transferred, regardless of the interest conveyed (although it must be at least 50%). So, if the real property in the above example is owned by a LLC and one of the owners sells his or her 50% member interests in the LLC to the other owner for $500,000, the REET will be calculated on the $1 million fair market value.
7. Can the REET be avoided if a controlling interest is transferred in increments? Generally no, any controlling interest transferred within a 12-month period is taxable. Thus, if 40% of the shares of a corporation are sold today, and then shares representing 10% are sold six months from today, neither transfer is of a controlling interest but because the transfers are within 12 months and the total interests transferred represent 50% of the entity, the REET applies. Also, all acquisitions of persons “acting in concert” must be aggregated for purposes of determining whether a transfer or acquisition of a controlling interest has taken place. The Department of Revenue’s rule on the taxability of the transfer or acquisition of the controlling interest of an entity owning real property in Washington (WAC 458-61A-101) has a comprehensive explanation of how the REET applies in these situations, including examples, and should be consulted.
8. How is the taxable “Selling Price” determined? The “selling price” upon which the REET is paid means the true and fair value of the real property conveyed. There is a rebuttable presumption that the true and fair value of the property is equal to the total consideration paid or contracted to be paid to the seller or to another person for the seller’s benefit. Oftentimes, the selling price paid does not accurately reflect the true and fair value of the real property (such as the sale of shares in a corporation where the selling price reflects the total amount paid for the shares and the real property is only a portion of the total underlying assets of the corporation). In such a case, one of the following methods may be used to determine the true and fair value of the real property subject to REET: (1) a fair market value appraisal of the real property; (2) an allocation of assets by the seller and the buyer made pursuant to section 1060 of the Internal Revenue Code; or (3) when the true and fair value of the property at the time of sale cannot reasonably be determined by either (1) or (2) above, the market value assessment for the property maintained in the county property tax rolls at the time of sale can be used as the selling price. This latter option is generally the most convenient.
9. Who pays the REET and when is it due? The law generally imposes the tax on the seller of the property. But, the REET is regularly negotiated between the seller and buyer, and it is not uncommon for the buyer to pay the tax. Sometimes the tax is split between buyer and seller. When the buyer pays the tax the Department of Revenue has taken the position that the amount of the tax does not represent additional consideration. The tax is generally due at the time of the sale and it is delinquent after 30 days. It must be paid before any documents are recorded by the county auditor. In a sale of a controlling interest, the parties have 30 days to file the REET affidavit with, and pay the tax due to, the Department of Revenue before interest and penalties begin to apply.
10. Department of Revenue Audits. The REET is one tax in which the Department of Revenue audits nearly 100% of transactions. A copy of the REET affidavit filed with the county is forwarded to the Department and, of course, controlling interest affidavits are sent directly to the Department. The Department will generally review every affidavit and may perform some research on the real property transferred. If an exemption from REET is claimed, the Department may follow up and ask for information or documentation that supports the exemption. Whenever the selling price listed on the REET Affidavit is less than the assessed value of the property, an audit may follow. A mistake in preparing the REET Affidavit is also a reason for the Department to audit the transaction. So, it is important to be very careful and accurate in preparing the Affidavit. It is also important to retain all documents related to the transaction until the statute of limitations (4 years) runs out on the Department of Revenue’s ability to assess additional REET.
There are many topics to consider when addressing the REET. This summary is by no means exhaustive. Please feel free to send your comments and questions for future blogs on this tax.