| Excise Tax Fraud--Beware! |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
Many real estate investors may be committing fraud in King and Pierce Counties. Real
estate excise tax is due upon the sale of real estate in every county in the State of
Washington. When an investor structures a transaction to avoid the excise tax without a
legitimate excise tax exemption, he commits real estate excise tax fraud, a serious offense.
Get ready for this. The state knows this fraud is occurring, and is collecting copies of
suspected files for possible prosecution by the county prosecutors or the state attorney
general. Real estate gurus who travel the country and tout their unique methods that can
make investors rich quick are often teaching these fraudulent techniques.
The Washington Administrative Code (WAC) in Chapter 458-61A defines how all this
works. The tax is due upon the immediate transfer of real estate or any interest in real estate
according to Chapter 458-61A-100. To make sure everyone understands exactly what a sale
is, the state defines it in Chapter 458-61A-102. The excise tax is not due on an option to sell
real estate.
Many of the exemptions are found in Chapters 458-61A-200 through 217. A popular
exemption is the transfer of real estate into a revocable living trust. This is a great way to
avoid probate and maintain confidentiality of the estate inventory. However, some real estate
investors have completed the Excise Tax Affidavit claiming the trust exemption when it is
really intended to be a transfer from a troubled property owner to the investor. That is
excise tax fraud. Another fraudulent approach is the seminar gurus' concept of a "land
trust." The seminar gurus who teach this pretend they have a new concept. They
recommend creating a land trust, and they get the owner to sign a deed transferring the
property into the trust, but nothing is recorded or reported to the excise tax office.
Whenever a property owner signs a deed, whether it is a quit claim deed, a special
warranty deed, a statutory warranty deed, or any kind of deed transferring the real estate
ownership to someone else or a trust (not specifically exempted in the WAC), the excise tax
is due whether the deed is recorded or not. The deed must be recorded within 30 days or
there will be penalties and interest. If the excise tax is avoided through investor shenanigans,
it is excise tax fraud, and you could end up with a civil and possibly a criminal prosecution.
Of course, the real estate investor is trying to purchase as many properties as possible
with as little money as possible, and then flip the properties for a quick profit. Avoiding the
excise tax is part of that plan. In Peirce and King Counties, buying foreclosure properties at
the trustee's sale has gotten so competitive, many properties are selling at or above fair
market value. Investors who are intentionally or naively committing excise tax fraud are
doing so in the pre-foreclosure transaction. In other words, they find owners in distress,
and cut a deal with them by selling them on the idea of saving their property from
foreclosure, taking over the payments, giving the owner a token amount to help them move
on, and then the investor does some cosmetics and flips the house for a small profit.
Some investors plan to have the owner/seller sign original documents at closing when the
investors sells the house to someone else, and the deed they had the owner sign was placed
in their file as protection if the owner changed his mind. In this case the excise tax is paid
when the original owner sells to the new buyer, and the investor is a middle man. Because a
deed was signed by the owner to the investor, the excise tax should have been paid but was
not. That is excise tax fraud.
What should investors be doing? That's fairly easy. When a property is purchased from a
distressed owner and a deed of any kind is signed, the excise tax should be paid. It is the
price of the real estate investment, and it is the law.
Many real estate investors who have learned these approaches are no doubt honest and
mean well, but they should be aware that they may be prosecuted someday as the auditors
collect copies of the documents, which I have been assured they are currently doing. The
auditors are working with the county prosecutors to determine how to proceed. My guess is
that the investor with the largest number of fraudulent transactions will be first, their example
to everyone else. I can see the headlines now in the Seattle Times. Eghad! Glad that's not
going to be me. By the way, I'm not interested in trying to represent anyone accused of
excise tax fraud. It will be ugly.
Copyright July 2, 2006, Charles E. Marunde, J.D.
estate excise tax is due upon the sale of real estate in every county in the State of
Washington. When an investor structures a transaction to avoid the excise tax without a
legitimate excise tax exemption, he commits real estate excise tax fraud, a serious offense.
Get ready for this. The state knows this fraud is occurring, and is collecting copies of
suspected files for possible prosecution by the county prosecutors or the state attorney
general. Real estate gurus who travel the country and tout their unique methods that can
make investors rich quick are often teaching these fraudulent techniques.
The Washington Administrative Code (WAC) in Chapter 458-61A defines how all this
works. The tax is due upon the immediate transfer of real estate or any interest in real estate
according to Chapter 458-61A-100. To make sure everyone understands exactly what a sale
is, the state defines it in Chapter 458-61A-102. The excise tax is not due on an option to sell
real estate.
Many of the exemptions are found in Chapters 458-61A-200 through 217. A popular
exemption is the transfer of real estate into a revocable living trust. This is a great way to
avoid probate and maintain confidentiality of the estate inventory. However, some real estate
investors have completed the Excise Tax Affidavit claiming the trust exemption when it is
really intended to be a transfer from a troubled property owner to the investor. That is
excise tax fraud. Another fraudulent approach is the seminar gurus' concept of a "land
trust." The seminar gurus who teach this pretend they have a new concept. They
recommend creating a land trust, and they get the owner to sign a deed transferring the
property into the trust, but nothing is recorded or reported to the excise tax office.
Whenever a property owner signs a deed, whether it is a quit claim deed, a special
warranty deed, a statutory warranty deed, or any kind of deed transferring the real estate
ownership to someone else or a trust (not specifically exempted in the WAC), the excise tax
is due whether the deed is recorded or not. The deed must be recorded within 30 days or
there will be penalties and interest. If the excise tax is avoided through investor shenanigans,
it is excise tax fraud, and you could end up with a civil and possibly a criminal prosecution.
Of course, the real estate investor is trying to purchase as many properties as possible
with as little money as possible, and then flip the properties for a quick profit. Avoiding the
excise tax is part of that plan. In Peirce and King Counties, buying foreclosure properties at
the trustee's sale has gotten so competitive, many properties are selling at or above fair
market value. Investors who are intentionally or naively committing excise tax fraud are
doing so in the pre-foreclosure transaction. In other words, they find owners in distress,
and cut a deal with them by selling them on the idea of saving their property from
foreclosure, taking over the payments, giving the owner a token amount to help them move
on, and then the investor does some cosmetics and flips the house for a small profit.
Some investors plan to have the owner/seller sign original documents at closing when the
investors sells the house to someone else, and the deed they had the owner sign was placed
in their file as protection if the owner changed his mind. In this case the excise tax is paid
when the original owner sells to the new buyer, and the investor is a middle man. Because a
deed was signed by the owner to the investor, the excise tax should have been paid but was
not. That is excise tax fraud.
What should investors be doing? That's fairly easy. When a property is purchased from a
distressed owner and a deed of any kind is signed, the excise tax should be paid. It is the
price of the real estate investment, and it is the law.
Many real estate investors who have learned these approaches are no doubt honest and
mean well, but they should be aware that they may be prosecuted someday as the auditors
collect copies of the documents, which I have been assured they are currently doing. The
auditors are working with the county prosecutors to determine how to proceed. My guess is
that the investor with the largest number of fraudulent transactions will be first, their example
to everyone else. I can see the headlines now in the Seattle Times. Eghad! Glad that's not
going to be me. By the way, I'm not interested in trying to represent anyone accused of
excise tax fraud. It will be ugly.
Copyright July 2, 2006, Charles E. Marunde, J.D.
