Reporting the sales price on a transaction for a real estate excise tax affidavit or refund petition can be tricky in the State of Washington, depending which side of the coin you’re on.

Seattle's hot real estate market presents two special tax-saving opportunities – or, for the unwary, two tax traps – involving Washington State's real estate excise tax.

The first arises when above-market rents in place at a property contribute to its selling price. The second occurs when the sale of a property experiences high vacancy. In both scenarios, some buyers and sellers report prices that are higher than they should be for the real estate excise tax. At nearly 1.8 percent of the property's sale price, real estate excise tax is a sizable trans-action cost that deserves attention.

Skewed By High Rents
With above-market rents, a portion of the sale price may reflect the value of contracts and business efforts. The tax only applies to the consideration paid for real estate, so the consideration paid for above-market contracts should be separated out as nontax-able.

Although we believe Washington law is clear on this, the Department of Revenue has been struggling to determine its position. The department recently agreed taxable value excludes the portion of the purchase price attributable to above-market rents, but then it changed its position.

Since these vacillations occur in the context of individual taxpayer cases, other taxpayers do not necessarily know what the department's position is at any given time. The department has not published any rules or guidance specific to this scenario.

Impaired By Vacancy
In the scenario involving the sale of a property with high vacancy, the buyer and seller frequently agree on a price as though occupancy were full and then deduct an amount for the vacancy shortfall. The deduction reflects the costs to lease the remaining space, and also the entrepreneurial profit the buyer requires for undertaking the risk and work required to achieve full occupancy.

Some parties to a transaction mistakenly report the stabilized value instead of the amount actually paid for the property. The only price they should report for tax purposes is the sum after deducting for vacancy, as that represents the actual amount paid.

Both parties have an incentive to ascertain and report the correct price on the real estate excise tax affidavit. Though the parties can negotiate who pays the tax, the seller is responsible for its payment by law. And yet, the Department of Revenue can enforce payment by placing a lien against the property, making the buyer indirectly liable.

Both buyer and seller sign the affidavit reporting the sales price, under penalty of perjury. Buyers may feel the ongoing effect of the reported price in the form of property taxes, since county assessors pay attention to the affidavits in determining property tax values. With this in mind, both parties should care about correctly reporting the transaction.

Buyers and sellers in either scenario can put themselves in a favorable tax position by presenting the information about the transaction carefully, whether in the affidavit or in a refund petition to the Department of Revenue. Note that a refund petition, if applicable, must be filed within four years of the transaction date.

Information about the transaction should be presented to the taxing authorities in a clear manner to establish the correct facts and legal analysis. In the first scenario, a detailed explanation of the facts ideally includes an appraisal that excludes the price paid for the value of the above- market leases in place, as opposed to the real property.

In reviewing the transaction, the Department of Revenue should presume the price paid is taxable, but the taxpayer can rebut that position. When the transaction price reflects more than the price for real estate alone, the department often next turns to the property's assessed value instead.

The taxpayer can argue that, by law, an appraisal as of the sale date trumps the assessed value as evidence of the taxable amount. For this reason, an appraisal is important for the above-market rent scenario.

In the high-vacancy scenario, however, the presumption applies that the price paid is taxable, and no appraisal should be needed. Therefore, the parties should report the actual price paid after accounting for the vacancy shortfall.

Recent experience indicates the Department of Revenue may choose to challenge an affidavit or deny a refund claim if it takes the position that the portion of the price attributable to above-market rent is untaxable. That does not mean the department is right, however, and its vacillations suggest its directors feel uncertain about their position. Taxpayers with strong facts should pursue the issue and work diligently to make a strong case that will help the department get to the right result.

Whether a sale involves the added value of contracts or a deduction for high vacancy, seeking professional advice about how to best report the transaction on the real estate excise tax affidavit, or in a refund petition, can turn the sale into a significant tax opportunity.

Norman J. Bruns and Michelle DeLappe are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local tax. Bruns is the Idaho and Washington representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Bruns can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Whether a business is a seniors housing facility, a racetrack or other service-oriented operation - or even a manufacturing plant - part of the business’ value may be intangible and exempt from property tax. Recent court cases underscore this critical premise and provide valuable reference points for taxpayers struggling against unfair tax practices.

Local governments in all states have authority to impose property tax on the value of real estate. Local governments in all but seven states also impose property tax on the value of at least some tangible personal property, or property that can be moved, such as equipment.

But in most states, local authorities are prohibited from taxing any additional value of a business as a going concern, meaning value attributable to a brand, reputation for product quality, intensive management, licenses, contractual rights, proprietary technology, and other intangible assets.

For example, if a manufacturing plant receives additional revenue because it packages items with a well-known brand’s label instead of a generic one, that brand is an intangible asset. In numerous cases it has been seen that the value of intangible assets equal or exceed the value of the taxable property. Whatever the business, removing intangible assets from the property tax bill is key.

California tests intangibles

Some states provide clearer guidance than others on identifying and quantifying intangible assets. California, in particular, has been a hotbed of controversy over the treatment of intangibles in valuation for tax purposes lately.

Stephen Davis, a partner in the Los Angeles law firm of Cahill, Davis & O’Neall, summed up the latest developments during a presentation at the Seattle Chapter of the Appraisal Institute Fall Real Estate Conference in October by saying that major cases in the last two years capped two decades of controversy. He should know, since his firm was counsel of record in the SHC Half Moon Bay vs. County of San Mateo case, decided in May 2014. Davis commented that the result of this new case law has been “a few new controversies instead of a clean resolution,” but much was resolved favourably for taxpayers and provided helpful lessons that should apply anywhere in the nation.

The main takeaway from California’s recent cases is the importance of an appraisal of each intangible asset in order to deduct that value from the overall business value.

In SHC Half Moon Bay vs. County of San Mateo, the four-star Ritz Carlton Half Moon Bay Hotel proved that the assessor inappropriately included in the hotel’s taxable value approximately $2.8 million of exempt value attributable to its workforce and to contractual rights involving a parking lot and golf course. Granting a significant victory to taxpayers, the appeals court made clear that merely subtracting franchise fees from the value indicated by the income approach to value did not account for the value of the hotel’s franchise rights and other goodwill.

What does that mean for taxpayers? Under this case, an appraisal that provides evidence of the value of each intangible asset should result in removing those intangible values from property tax assessments. The reasoning espoused in this decision from California should apply in any state where intangible property is exempt from property tax.

For example, just last year the Montana Supreme Court declared invalid a Montana Department of Revenue regulation that attempted to narrow that state’s broad exemption for intangibles, such as by requiring valuation of goodwill only by the accounting method.

A growing volume of cases argues for valuing the intangible assets of a wide range of businesses by using generally accepted appraisal practices, bolstering the position of taxpayers defending themselves against unfair taxation of those assets.

Source URL: http://nreionline.com/tax-strategies/recent-cases-affirm-tax-exempt-status-intangible-valueRecent

Norman J. Bruns and Michelle DeLappe are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local tax. Bruns is the Idaho and Washington representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Bruns can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"Multifamily housing in King County may be particularly susceptible to inflated assessments in the upcoming years."

Each week seems to bring news of yet another record-selling price for a commercial property in Seattle, including assets ranging from office and retail to apartments and even development sites. Increasing occupancy rates for industrial and retail properties also suggest that property values are headed up.

The King County assessor has undoubtedly tracked these price trends, too. In 2012, the assessor's office reported overall increases in taxable values for major office buildings, major retail properties, hotels and apartments. As a result, many commercial property owners in the Puget Sound region saw increases on their 2012 assessed value notices. In March, King County's chief economist projected that total assessed values in the county would reach nearly $327 billion in 2013 (for taxes payable in 2014), up nearly 4 percent from $315 billion in 2012.

For many taxpayers, notices in 2013 will reflect assessment increases even greater than 4 percent. The general recovery in the Seattle market should not trigger increased assessments for all properties. For example, some suburban areas have missed out on the trend toward increasing property values. And there are always individual properties that do not experience the same increases as their neighbors. Accordingly, owners should be attentive to potentially overstated assessed values.

Multifamily housing in King County may be particularly susceptible to inflated assessments in the upcoming years. One reason is the high prices paid in recent transactions. Another is the ongoing development of many new apartment projects. Even as that construction fervor gives assessors the idea that apartments are hot commodities, these new projects increase the risk of value-sapping oversupply in some submarkets.

Assessed values for Single-family residences make up roughly two thirds of the tax base in Seattle. With that said, home prices have risen 10.6 percent in the past 12 months, according to the Standard & Poor's/Case-Shiller Home-Price Index that was released in late May. As many homeowners receive higher assessments in 2013, that should provide at least some measure of relief for commercial taxpayers.

Prepare For Tax Increases

Budgeting for an upcoming year's property tax bill is always a challenge, in part because tax rates can vary significantly by year and location. Seattle's tax rates decreased each year from 2004 through 2008, then rose a whopping 13 percent in 2009. They have continued to climb each year since. A further, small increase in 2014 tax rates is likely. Within King County, tax rates can vary widely even within a single year. While Bellevue has a tax rate of less than 1 percent for 2013, suburbs in South King County employ tax rates that are half-again higher: Kent, Des Moines and Federal Way rates range from 1.45 percent to 1.6 percent. In order to guard against an in- Dated tax bill professionals must ensure that assessed value notices get routed to a responsible person. If an assessment seems too high, then the appeal petition must be filed within 60 days of the notice's mailing date to preserve the owner's appeal rights.

Most commercial property owners should budget for increased tax liability for 2014 taxes, given the prospect of generally rising assessed values in 2013 and the likelihood of higher tax rates in 2014. Property owners should receive notification of new assessed values by this fall. Then in late January, when counties publish final tax rates, property owners can calculate their tax burden and revise budgets accordingly.

Michelle DeLappe and Norman J. Bruns are attorneys at Garvey Schubert Barer, Washington and Idaho member of American Property Tax Counsel, the national affiliation of property tax attorneys. Michelle DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and Norman Bruns can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..