Legislative Update: House Bill 2539 Clarifies the Application of the Real Estate Excise Tax to Property Inherited by Operation of Law
In Washington, the real estate excise tax (REET) is imposed on the sale of real property, which includes the transfer of ownership and the transfer of controlling
interests in real property. RCW 82.45.197 provides for several exemptions from the REET. One of the allowable exemptions is for individuals who inherit real property when one of the following documents is provided (or already filed with the county), along with a certified copy of the death certificate:
- a community property agreement;
- a trust agreement;
- a certified copy of the letters testamentary or letter of administration;
- a deed;
- a copy of a court order requiring the transfer; or
- a lack of probate affidavit for a community property interest.
While seemingly straightforward, some counties have been confused on whether individuals who inherit property by operation of law, but without any accompanying documentation, still qualify for the exemption. Some county treasurers are apparently interpreting RCW 82.45.197 as authority to require heirs who receive title by inheritance to pay REET if they did not have proper documentation. Those counties were taking the position that a probate was required to avoid REET. If the documentation is not perfect, the heirs as sellers must pay REET and penalties before the intended sale may be recorded. Any pending sale would then require another payment of REET as a taxable sale. House Bill 2539 was drafted to clear up any confusion regarding what is required under this circumstance and make clear that the REET does not apply when property is inherited.
House Bill 2539 works to modify the conditions required to qualify for the inheritance exemption to include circumstances where a person inherits property by operation of law, but absent a will, trust, community property agreement, or other document or court order.
House Bill 2539 modifies the intent language of RCW 82.45.197, addresses skip transfers, and restores the current law requirement that when property is transferred pursuant to a court order, a certified copy of the court order must be provided. House Bill 2539 also adds additional date points for the lack of probate affidavit. Pursuant to the Bill, to qualify for the exemption, the heir (or heirs) must submit a certified copy of the death certificate along with a lack of probate affidavit affirming that he or she is the rightful heir to the property. Below is the language proposed to add and amend RCW 82.45.197:
(1) In order to receive an exemption under RCW 82.45.010(3)(a) from the tax in this chapter on real property transferred as a result of a devise by will or inheritance, the following documentation must be provided to the county treasurer:
* * *
(g) If the real property is transferred to one or more heirs by operation of law, or transferred under a will that has not been probated, but absent the documentation set forth in (a) through (e) of this subsection, a certified copy of the death certificate and a signed lack of probate affidavit affirming that the affiant or affiants are the sole and rightful heirs to the property;
Hopefully the proposed changes, if passed, will address the protests increasing throughout several counties.
Comment: The Bill passed the House on February 16, 2016, and it is anticipated to pass the Senate. While the Bill is about administrative clarity, it will expand the potential documentation that will satisfy an heir’s right to claim an exemption from REET. We probably will not know whether it is likely to become law until the end of the Legislative session.