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
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 with good intentions, 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 now 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.
Last Updated on September 1, 2019 by Chuck Marunde
Your article on Estate Excise Tax Fraud is always useful for a newbie like me.
It’s surprising that people would be involved in Excise tax fraud, but apparently they do.
Great stuff – Once again you delve into your box of tricks and pull put a gem.
Another great article from the Sequim real estate blog, which by the way is read by a lot of us half way on the other side of the world. We talk about Sequim WA in the United Kingdom. Love your photos. Your site is like an encyclopedia of knowledge and photos and videos of Western Washington in the Northwest United States. Love your daily articles.
Its good to see that the state is aware of the fraud. It always amazes me that people think they can get away with stuff like that.