Is a transfer of mortgaged Washington real estate a REET-exempt gift when the recipient refinances and pays off the transferor's debt?

Plain-English summary

The Washington Department of Revenue held that a daughter's transfer of mortgaged real estate to her father was a taxable sale, not a REET-exempt gift, because the father refinanced and paid off her mortgage debt. No cash had to be paid directly to the daughter for consideration to exist.

The daughter transferred a 50% interest and later the remaining 50% by quitclaim deed. Within six months of the first transfer, her father obtained a reverse mortgage that paid off the two existing mortgages. The daughter stopped making payments and was relieved of the debt.

Washington's gift rule treats payments toward existing or refinanced debt as consideration. It also creates a rebuttable presumption of a sale when the grantee participates in refinancing within six months of the transfer. The REET measure included the underlying debt from which the daughter was relieved.

The filed affidavits did not accurately describe what occurred: one said there would be no refinance and the daughter would keep paying, while the mortgages were in fact refinanced and paid off. The petition was denied.

What this means for you

Families transferring property

A deed between relatives can still be a taxable sale when the recipient assumes, pays, or refinances debt attached to the property. The absence of a cash payment does not establish a gift.

Homeowners using reverse mortgages

If reverse-mortgage proceeds pay off the transferor's loans as part of or soon after the transfer, the debt relief can be REET consideration.

Closing professionals and tax preparers

Complete REET affidavits based on the entire planned transaction, including refinancing and who will make future debt payments. Later facts inconsistent with the affidavit can defeat a claimed exemption.

Common questions

Q: Why was paying a lender consideration to the daughter?

A: The payoff relieved her of the mortgage obligations. Washington's rules treat a grantee's payments toward the transferor's underlying debt as consideration.

Q: Did the father or daughter receive cash from the reverse mortgage?

A: No, but the proceeds paid off the existing mortgages, which was enough to create consideration.

Q: Is every transfer of mortgaged property taxable?

A: Not automatically. This determination involved actual debt payoff and relief tied to the transfer. Other facts require their own analysis under the gift and debt rules.

Q: Why did the six-month timing matter?

A: Rule 201 created a rebuttable presumption that a transfer is a sale when the recipient is involved in refinancing the property debt within six months.

Q: How was REET measured?

A: By the amount of underlying mortgage debt paid off or assumed as consideration, along with any other consideration if present.

Citations and references

• RCW 82.45.010(3)(a) (gift transfers)
• WAC 458-61A-201 (gift exemption, debt consideration, and refinancing presumption)
• WAC 458-61A-103 (debt relief and tax measure)
• WAC 458-61A-102 (consideration)
• Det. No. 01-039, 20 WTD 520 (2001)

Source

• Landing page: Washington Tax Decisions ZIP files
• Original PDF: 31WTD78.pdf
• Source archive: Volume 31 ZIP (member 31WTD78.pdf)

Original ruling text

Det. No. 11-0026, 31 WTD 78 (November 7, 2012)

78

Cite as Det No. 11-0026, 31 WTD 78 (2012)

BEFORE THE APPEALS DIVISION
DEPARTMENT OF REVENUE
STATE OF WASHINGTON
In the Matter of the Petition For Correction of )
Assessment of
)
)
...
)
)
)
)

DETERMINATION
No. 11-0026
Registration No. . . .
Document No. . . .
Docket No. . . .

WAC 458-61A-201; WAC 458-61A-103; RCW 82.45.010:
REET-CONSIDERATION-- DEBT. Even if no money is directly paid to the grantor for the transfer of real property, a grantor receives consideration where a grantee makes payments toward underlying debt on the transferred property, or the grantee agrees to assume payment of the grantor’s debt on the property in return for the transfer. Headnotes are provided as a convenience for the reader and are not in any way a part of the decision or in any way to be used in construing or interpreting this Determination.

Pree, A.L.J. – A daughter, who quitclaimed mortgaged real property to her father who paid off the mortgages with a reverse mortgage, protests the assessment of real estate excise tax (REET) on the transfer, arguing the transfer qualifies for the gift exemption in WAC 458- 61A-201. We conclude the transfer was a sale, not a gift, and deny the petition. ISSUE Was a daughter’s transfer of mortgaged real property to her father a gift, exempt from REET under WAC 458-61A-201, where the father paid off the daughter’s mortgages with a reverse mortgage?1

1

Identifying details regarding the taxpayer and the assessment have been redacted pursuant to RCW 82.32.410.

Det. No. 11-0026, 31 WTD 78 (November 7, 2012)

79

FINDINGS OF FACT
[Taxpayer] owned real property including a house in Washington. The property was subject to two mortgages upon which the taxpayer had made the payments until the beginning of 2009. On June …, 2009, she filed a quit claim deed, which transferred a 50% interest in her house to her father, . . . . Then, on December . . ., 2009, the taxpayer transferred her remaining 50% interest in the real property to the grantee. To avoid foreclosure, on December . . . 2009 [within six months of the June, 2009, transfer], the grantee took out a reverse mortgage, which paid off the existing mortgages. The balance due on the two mortgages totaled $. . . . Neither the grantee, nor the taxpayer, received any money as a result of the refinance. When the [June, 2009,] deed was recorded, the taxpayer and the grantee filed a real estate excise tax affidavit. On the supplemental statement, they claimed a gift exemption, and did not pay real estate excise tax. They checked a box indicating that there had not been, and would not be, a refinance of the debt. According to the form they both signed, the taxpayer would continue to make 100% of the payments on [the mortgage] debt due.
[On December . . ., 2009, the taxpayer filed another REET affidavit claiming the gift exemption. The taxpayer checked a box indicating, “There is no debt on the property, Grantor has not received any consideration towards equity”. The taxpayer also checked the box indicating a refinance of the debt.] The Department of Revenue reviewed the transaction. On June 9, 2010, the Department’s Special Programs Division assessed $. . . REET plus a 20% delinquent penalty, a 5% assessment penalty, plus $. . . interest. The above referenced assessment totaled $. . . . The taxpayer appealed, stating there was no sale. The affidavit[s] filed by the grantee and taxpayer were not correct. The mortgages were refinanced with the reverse mortgage. The taxpayer did not continue to pay on the debt. The reverse mortgage paid off the taxpayer’s mortgages, which were in place prior to the transfers of her interest to the grantee.

ANALYSIS
The taxpayer contends her quitclaim transfer of the real property qualifies for the gift exemption from REET. REET does not apply to transfers by gift. RCW 82.45.010(3)(a). WAC 458-61A201 (Rule 201) is the administrative rule implementing the gift exemption. Rule 201 states, in pertinent part: (1) Introduction. Generally, a gift of real property is not a sale, and is not subject to the real estate excise tax. A gift of real property is a transfer for which there is no consideration given in return for granting an interest in the property. If consideration is

Det. No. 11-0026, 31 WTD 78 (November 7, 2012)

80

given in return for the interest granted, then the transfer is not a gift, but a sale, and it is subject to the real estate excise tax to the extent of the consideration received. (2) Consideration. See WAC 458-61A-102 for the definition of "consideration." Consideration may also include: (a) Monetary payments from the grantee to the grantor; or (b) Monetary payments from the grantee toward underlying debt (such as a mortgage) on the property that was transferred, whether the payments are made toward existing or refinanced debt. (3) Assumption of debt. If the grantee agrees to assume payment of the grantor's debt on the property in return for the transfer, there is consideration, and the transfer is not exempt from tax. Real estate excise tax is due on the amount of debt assumed, in addition to any other form of payment made by the grantee to the grantor in return for the transfer. However, equity in the property can be gifted. (4) Rebuttable presumption regarding refinancing transactions. (a) There is a rebuttable presumption that the transfer is a sale and not a gift if the grantee is involved in a refinance of debt on the property within six months of the time of the transfer. Further, WAC 458-61A-103(1) provides as follows: The real estate excise tax applies to transfers of real property when the grantee relieves the grantor from an underlying debt on the property or makes payments on the grantor's debt. The measure of the tax is the combined amount of the underlying debt on the property and any other consideration. Under these rules, even if no money is directly paid to the grantor for the transfer of real property, a grantor receives consideration where a grantee makes payments toward underlying debt on the transferred property, or the grantee agrees to assume payment of the grantor’s debt on the property in return for the transfer. See Det. No. 01-039, 20 WTD 520 ( 2001); C.f., Det. No. 04-0106, 23 WTD 344 (2004). If consideration is given in exchange for the transfer, then the transfer is not a gift, but a sale, and subject to REET to the extent of the consideration given. We conclude the taxpayer transferred real property subject to mortgage debt, and that the grantee paid off the mortgages using a reverse mortgage. The taxpayer made no payments on the debt after the transfer. Therefore, we conclude that the transfer was a sale, and not a gift, and was taxable to the extent of the consideration present. In this case, relief of the amount due under the two mortgages constituted the consideration to the taxpayer.

Det. No. 11-0026, 31 WTD 78 (November 7, 2012)

81

REET was due on the taxpayer’s transfer of her interest in real property. The Special Programs Division properly measured the tax by the underlying debt on the property. Accordingly, the petition for correction of assessment is denied.

DECISION AND DISPOSITION
Taxpayer's petition is denied.
Dated this 25th day of January, 2011.