If you own property in Washington state, such as a house, and are considering adding a family member to the title of your property, you need to make sure that you use the right type of deed for the transfer and accurately determine whether Washington state’s real estate excise tax is due on the transfer.
If you are receiving an interest in real property, you should make sure that the form of the deed that is used in the transfer protects your interests and that the Real Estate Excise Tax Affidavit that you will sign as part of the transfer is accurately prepared and reflects the correct amount of excise tax that is due.
This article reviews these key issues. We refer to the person or entity (such as an LLC or trust) transferring real property as the “grantor” and the person or entity receiving the interest in real property as the “grantee.”
Concerns for the Grantor
From the grantor’s standpoint, if the incorrect deed is used, or if excise tax is due and not properly paid, then the grantor can face potentially significant liability as a result of the transaction. This liability can include warranty liability to the grantee (or others) and financial liability to the Washington Department of Revenue. Grantors typically want to limit the future liability they may owe to grantees, so grantors frequently want to use Quit Claim Deeds whenever possible.
Concerns for the Grantee
Grantees want to ensure that the title is legally transferred and that all of the warranties that the grantee wants (or has negotiated for) are made by the grantor. In some circumstances, if real estate excise tax is due on the transfer and not paid by the grantor, then the grantee may be responsible for payment of the tax. Grantees typically want as much warranty protection from the grantor as possible, so grantees typically demand that the grantor use a statutory warranty deed. Our lawyers have seen a number of circumstances where a grantee did not correctly determine which deed to use, causing significant damage and expense.
First Question: Determine if the Transfer is Taxable
If you are planning on completely transferring your property, or if you want to add someone onto the title of your property, then you need to first understand whether the transfer is taxable or not under Washington law. Every transfer of an interest in real estate requires the payment of applicable real estate excise tax, unless a specific exemption is available.
A frequently used exemption is for a gift of real property – when the transfer is a gift, then no excise tax is due. However, whether a transfer is a gift or not requires careful review of the facts surrounding the transfer. To the extent that the grantor receives anything of value (also known as consideration), then the transfer is taxable to the extent that value is given.
If the person receiving the property assumes any responsibility for making payments on underlying debt, then the transfer will be at least partially taxable. For example, suppose a person owns real property with a loan on the property, and decides to make a gift to a family member. If the family member coming onto title agrees or actually makes a portion of the payments on the loan, then the transfer is no longer a pure gift and excise tax will need to be calculated and paid.
B. Community/Separate Property and Divorce.
Other common reasons for a transfer to be exempt from real estate excise tax is the transfer of an interest in title to another person to either create community property or to create separate property, or if the transfer is made in connection with a divorce.
C. Quieting Title.
Sometimes, a deed is recorded in order to “quiet title” to property. This phrase means that a person is releasing any interest in real property to the extent that he or she has any interest. Sometimes, there is a dispute about whether a person has any interest, and a quit claim deed (described below) is used to ensure that the person has no interest whatsoever in the property. This type of transfer is generally not taxable.
Second Question: Which Deed Should I Use?
As discussed in our separate article about deeds, there are three main types of deeds used in Washington state: i) Statutory Warranty Deed; ii) Bargain and Sale Deed; and iii) Quit Claim Deeds. The key differences between these deeds centers on the type of warranties made by the grantor to the person receiving the interest in property.
Statutory Warranty Deed. A grantor who executes a Statutory Warranty Deed makes four warranties to the person receiving title (the grantee): 1) that the grantor owns a fee simple estate in the property; 2) that the grantor has good right and full power to convey the property; 3) that the land is free from all encumbrances which may have existed before the grantor acquired the property and during the grantor’s ownership; and 4) that the grantor warrants that the grantee will have quiet possession of the property and that the grantor will defend the title of grantee against anyone else who claims an interest.
Bargain and Sale Deed. A grantor who executes a Bargain and Sale Deed makes the same warranties as for a Statutory Warranty Deed, except that the grantor does not make any warranties as to encumbrances (such as liens) which were made against the property before the grantor took ownership of the property.
Quit Claim Deed. This is the type of deed used most commonly when a person adds another onto title. With a Quit Claim Deed, the grantor makes no warranties of title – rather, the grantor simply releases and transfers to the grantee whatever interest the grantor had in the property. This is used most commonly with gift transactions, and is the type of deed that will be used in other circumstances where the grantee is not paying for the interest in the property. Other examples for the use of Quit Claim Deed include the transfer of property into a Washington revocable living trust.
Grantors need to make sure that the proper deed is used and that all applicable excise tax is paid if the transfer is not exempt. Washington state’s excise tax regulations are complex and easy to misunderstand.
Lucent Law offers a comprehensive Property Deed Package for Washington and Idaho property transfers, which includes reviewing the transfer and determining excise tax obligations by an experienced real estate lawyer. We also handle the preparation of the Real Estate Excise Tax Affidavit and recording the deed and filing of the excise tax affidavit, either by using our in-person or electronic notary services and our convenient electronic recording. Contact us for a consultation.