United States

Washington: REET imposed on Full Value of Real Property Held by LLC When 50 Percent of the LLC was Sold

Aug 14, 2017
From KPMG TaxWatch

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Recently, a tax review officer for Washington State heard a protest involving application of real estate excise tax (REET) to the transfer of a 50 percent interest in an LLC that owned real property. Under Washington law, REET is imposed on the sale of real property located in Washington. A “sale” also includes a transfer of fifty percent or more of the capital, profits, or beneficial interest in a partnership or other entity that holds real property. The taxpayer was a two member LLC that owned real estate. One member transferred its 50 percent ownership interest to the other member. It appeared that the transfer was in part a gift, and in part in exchange for the other member assuming the mortgage on the real property held by the LLC. Under Washington law, the tax base used to determine REET liability is based on the selling price of the real property held by the LLC. If, as in the instant case, the total consideration for a sale cannot be ascertained, the market value assessment for the property maintained on the county property tax rolls at the time of the sale will be used as the selling price. The transaction raised two issues that were before the tax review officer. The first was what market value assessment to use for the purposes of determining the REET when the sale occurred on or around January 1, 2015. The taxing authority used the assessed value on which property taxes were assessed for 2015 and due in 2016. The taxpayer argued that the appropriate value was the assessment value for 2014 and for which taxes were due in 2015. The tax review officer agreed with the taxpayer, noting that at the time of the transfer, the 2015 assessment value would not have been on the tax rolls and that the statute clearly mandated that the value at the time of sale be used. The second issue was whether the measure of REET should be proportional to the 50 percent interest that was transferred. In other words, the taxpayer essentially argued that it should only be liable for REET based on 50 percent of the selling price—here the market value assessment. The hearing officer disagreed, noting that nothing in Washington law allowed only a portion of the selling price to be used for purposes of computing REET liability. Also, Washington regulations included an example in which the transfer of a 50 percent interest in real estate would be subject to the full REET. Please contact Michele Baisler at 206-913-4117 with questions on Det. No. 16-0289.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.