Did Washington’s real estate excise tax apply when a borrower deeded property to the lender in lieu of foreclosure and immediately bought it back?

Plain-English summary

In 1965, the Washington Attorney General concluded that a mortgagor’s deed to the mortgagee in lieu of foreclosure was exempt from real estate excise tax. The mortgagee’s immediate resale to the former mortgagor under a contract of sale was taxable. The AG treated the contract as a separate transfer even though both steps formed an overall arrangement to avoid foreclosure. (Official opinion)

The official page’s opening synopsis reverses the deed’s parties in its first point. Its stated question and analysis consistently identify the deed as running from the mortgagor to the mortgagee; this summary follows that analysis while reproducing the synopsis unchanged below.

Currency note

This opinion was issued in 1965. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Was the borrower’s deed to the lender taxed?
No. The AG applied the deed-in-lieu-of-foreclosure exemption to the deed from mortgagor to mortgagee.

Was the lender’s immediate contract resale back to the borrower taxed?
Yes. The AG said a contract to convey real property counted as a taxable sale.

Did combining the two steps into one agreement remove the resale tax?
No. The opinion treated the later contract as a distinct transfer without an applicable exemption.

Background and statutory framework

A Stevens County prosecutor described a delinquent mortgagor who deeded property to the mortgagee, extinguishing the old debt, and then signed a contract to buy the property back. The AG distinguished the exempt deed from the subsequent taxable sale contract under RCW 28.45.010.

Citations and references

• The official opinion states: “the transfer by deed from the mortgagor to the mortgagee in lieu of foreclosure is not subject to the real estate excise tax”
• The official opinion states: “The subsequent sale on contract to the former mortgagor is, on the other hand, a taxable transfer.”
• The official opinion states: “the latter [[Orig. Op. Page 3]] is a distinct transfer”

Subject

TAXATION - PROPERTY ‑- REAL ESTATE EXCISE TAX ‑- TRANSFER BY DEED IN LIEU OF FORECLOSURE ‑- RESALE UNDER CONTRACT OF SALE

Source

• Landing page: https://www.atg.wa.gov/ago-opinions/taxation-property-real-estate-excise-tax-transfer-deed-lieu-foreclosure-resale-under

Original opinion text

Attorney General John J. O'Connell

TAXATION ‑- PROPERTY ‑- REAL ESTATE EXCISE TAX ‑- TRANSFER BY DEED IN LIEU OF FORECLOSURE ‑- RESALE UNDER CONTRACT OF SALE.

1. The real estate excise tax does not apply to a transfer of real estate by deed from a mortgagee to the mortgagor in lieu of foreclosure.

2. Same: The tax does apply to the immediate resale of the property by the mortgagee to the mortgagor under a contract of sale.

3. Same: The fact that the two transfers constitute an over-all agreement between the parties does not affect the tax consequences.

October 14, 1965

Honorable Sid Buckley
Prosecuting Attorney
Stevens County Court House
Colville, Washington 99114

Cite as: AGO 65-66 No. 47

Dear Sir:

By a previously acknowledged letter you have requested our opinion on three questions pertaining to the real estate excise tax. We paraphrase your questions as follows:

1. Does the real estate excise tax apply to a transfer of real estate by a deed from a mortgagor to the mortgagee in lieu of foreclosure?

2. Does the tax apply to the immediate resale of the property by the mortgagee to the mortgagor under a contract of sale?

3. Does the fact that the two transfers constitute an overall agreement between the parties affect the tax consequences?

We answer the first and third questions in the negative and the second in the affirmative.

[[Orig. Op. Page 2]]

ANALYSIS

It appears from the facts as set forth in your letter that a mortgagor, being in arrears and unable to make his mortgage payments, deeded the mortgaged property to the mortgagee. The indebtedness was thereupon cancelled and the mortgage satisfied. Immediately, a contract of sale was executed with the mortgagee as vendor and the mortgagor as vendee. The amount to be paid by the vendee consists of the unpaid balance of mortgage principal, accrued and delinquent interest to date of contract, taxes, insurance, recording fee and cost of title policy insuring title of the vendor.

1. We agree with your conclusion that the transfer by deed from the mortgagor to the mortgagee in lieu of foreclosure is not subject to the real estate excise tax under the provisions of RCW 28.45.010 which expressly exempts transfers for such purposes.

2. The subsequent sale on contract to the former mortgagor is, on the other hand, a taxable transfer. RCW 28.45.010 defines sales subject to the tax as including not only the actual conveyance or transfer of the ownership or title to real property but also a contract for such conveyance or transfer. The tax is measured by the consideration contracted to be paid by the vendee.

3. The fact that the deed and the subsequent contract of sale can be said to be parts of an over-all agreement to avoid foreclosure does not affect the tax consequences of the latter transfer. It is the intent of the act to tax each sale of real estate in the county except those expressly exempted and no exemption is accorded executory contracts such as we are here considering.

Upon the execution of the deed by the mortgagor, its delivery to the mortgagee; the satisfaction of the mortgage and the cancellation of the indebtedness; the entire title merged in the mortgagee. Anderson v. Starr, 159 Wash. 641, 294 Pac. 581 (1930); Gill v. Strouf, 5 Wn.2d 426, 105 P.2d 829 (1940). There is no junior or intervening encumbrance or title of a third person which would prevent such a merger.

No matter how closely connected the satisfaction of the mortgage might be with the execution of the contract, the latter [[Orig. Op. Page 3]] is a distinct transfer evidencing the different rights and interests the parties now have in the property.

We trust the foregoing will be of assistance to you.

Very truly yours,

JOHN J. O'CONNELL
Attorney General

HENRY W. WAGER
Assistant Attorney General