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Tom Kelly
Tom Kelly
The Real Estate Adviser

April 26, 1996

GIVING PROPERTY CAN BE TAXING

By Tom Kelly
The Real Estate Advisor

The question had been raised before, but the letter clearly held the anxiety of a mother stuck with a problem she never thought she would have to face.

"I want to gift this property to my son," the Bothell widow wrote, "but I don't even have enough property to do that. I simply can't afford to pay the transfer taxes and it's tearing me up."

If you are about to make a gift of real estate to family or friends expecting to pay no out-of-pocket expenses, make sure there is no debt remaining on the property.

A gift of real property is subject to real-estate excise tax if there is a debt against the property and the donor does not continue to make the payments on the debt. To claim an exemption from this tax, both the donor and the recipient must sign a supplemental statement indicating debt, if any, against the property.

"The tax accountants say the best possible situation is having a tax deduction and you don't have to pay anything," said Dwight Bickel, legal counsel for Transnation Title Insurance Company and Commonwealth Land Title Insurance Company. "This is an example of the opposite: Here you have a tax with no revenue to pay it."

There is no transfer tax -- or known commonly as excise tax -- due on a gift the is given free and clear of any liens. A debt, or mortgage, is a lien. If you assume debt, the deal is no longer tax-exempt. By taking on the debt, the buyer, or donee, is definitely giving "consideration" for the property." (Consideration is anything of value offered to induce someone to enter into a contract.)

For example, let's say a couple owns a summer cottage valued at $150,000. The couple intends to "gift" the property to their three children. There is a bank loan on the property for $40,000. If the kids get the property and begin making the payments on the $40,000, excise tax will be charged on the $20,000 (debt against the cottage). If the parents continue to make the payments, no excise tax is due.

Until 1993, a person could assume a debt on a property -- provided he or she paid no other consideration -- and be exempt from excise tax.

Let's say Cyndy owed $75,000 on her home, lost her job and was unable to make the payments. Nancy comes along and assumes Cyndy's $75,000 debt and takes title to the property without paying Cyndy a penny out of her pocket. This deal is now subject to excise tax when it previously was not.

If they are properly structured, there are some similar deals that can be done without paying excise tax. If a Deed in Lieu of Foreclosure is used (owner is giving up the property instead of going through foreclosure) the excise tax typically is not due.

The amount of excise tax in Seattle was increased from 1.53 percent of the sales price to 1.78 percent, effective March 19,1992. Local governments, county and city, have the right to impose taxes on the transfer of title that happens when real estate is sold in this state.

For example, much of King County carries a 1.78 percent excise tax. However, there are several local exceptions including Kent, Auburn, SeaTac, Normandy Park, Hunts Point, Medina and Tukwila that are taxed at 1.53 percent.

The highest excise tax in the state? Friday Harbor in San Juan County is at 2.78 percent while unicorporated San Juan County charges 2.53 percent on its property transfers.

The state Legislature first authorized the tax to provide money for schools, but it has since served a variety of needs, including financing for roads and low-income housing. For many years the tax was a flat 1 percent of the sales price, but it now varies from county to county.

In the end, there is really no free avenue for the mother wanting to gift her mortgaged property to her son. And I believe there should be. I don't think the intent of the law was to ding family gifts.



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