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..

Updated june 2020

Property Tax Relief Proposed for Commercial Real Estate

While many types of commercial real estate have been hit hard by the COVID-19 pandemic, immediate property tax relief has been in short supply. Immediate tax reductions are available in the event of unexpected physical destruction, such as by fire or flood, but the application of that statute to the pandemic is less clear. Another statute gives relief for government restrictions that cause a loss in value, but the timing of that relief is problematic. The King County Assessor recently proposed legislation to address the problems with current law:

https://www.youtube.com/watch?v=OYkb0f4QLnc. 

The next regular session of the state legislature convenes in January 2021, but the governor may call a special session sooner in order to work on a large budget shortfall. Now is the time to be in touch with your legislator to press the view that property tax relief for commercial real estate should be high on the list of priorities.

Norman J. Bruns & Michelle DeLappe
Foster Garvey PC
American Property Tax Counsel (APTC)

The question arises all too often: Is the recent sale price of a property the best evidence of the property's taxable value?

Basic appraisal principles dictate that market value is the price upon which a willing buyer and willing seller would agree. Coming out of the recent recession, however, assessors continue to question whether the purchase prices paid for commercial or industrial properties reflect the properties' market value.

The confusion derives from the distressed sales that dominated commercial real estate transaction activity during the recession. As tenants defaulted on leases and property incomes plummeted, many owners were either compelled to sell their real estate in order to avoid foreclosure, or gave their underwater properties back to lenders. A number of lenders simply sold those assets after foreclosure at liquidation prices, adding to the volume of sales at distressed pricing levels.

Where the majority of sales of similar types of property are distressed, those sales may become the market, establishing pricing even for non-distressed sellers. To assert a higher taxable value on a property in this scenario, the assessor would have to demonstrate that these sales defy current economic conditions.

Now, as the country's economy begins to improve and property owners remain cautiously optimistic that the recession is ending, which recent sales truly represent market value? It is a challenging question for property owners and assessors seeking to use recent transactions for sales comparisons in order to determine current market value and taxable value of a property.

In many parts of the country, there was a complete dearth of sales and little construction activity during the downturn. In those areas, the sale of a property may have been the only transaction that occurred in that market in several years, with no other sales available for comparison.

With the uptick in the economy, assessors are latching onto recent transactions as fully indicative of a new market, and are inflating assessed taxable values in the process. Distinguishing the value indicated by a property's sale price remains vital to having it correctly assessed.

One reason that evaluating a sale for tax purposes requires more than just looking at the closing price is that the sale price may reflect financial incentives and tax-exempt components included to motivate the buyer or seller. For example, sale prices paid for restaurants, hotels, nursing homes and some industrial plants may reflect the value of the business enterprise, as opposed to just the real estate.

In Oregon, California and Washington, many intangible assets may be exempt from taxation for most properties. Thus, for purposes of determining the property's taxable market value, the appraiser or assessor must determine and exclude the value of the intangible rights relating to the business.

In Oregon, properties other than those used in power generation or other utility services may have tax-exempt intangible assets including goodwill, customer contract rights, patents, trademarks, copyrights, an assembled labor force, or trade secrets. Properly separating real estate value from the business enterprise value can substantially reduce the assessed value.

Additionally, an often overlooked influence on the sale price may be the existence of a sale- leaseback provision. In Oregon and many other states, real market value for tax purposes involves a willing seller and willing buyer in an open-market transaction, without consideration of the actual leases in place.

Thus, in the sale of a building fully leased to an ongoing enterprise that sets the buyer's anticipated rate of return, the assessor must extract the existing lease value and instead apply market lease and occupancy rates to arrive at the real market value for taxation purposes. In other words, whether the leases in place at a sold property are at, above, or below market rates affects the relationship of its sale price to taxable value.

Assessment requires more than simply assuming that the sale price is the sole indicator of value. For a vacant property, the sale price may be the best indicator of value. But any transaction used to establish market value for tax purposes needs to be thoroughly vetted. Taxpayers should keep these principles in mind when reviewing the assessor's process to set the taxable value of their real estate.

Cynthia M. Fraser is a partner at the law firm Garvey Schubert Barer where she specializes in property tax and condemnation litigation. Ms. Fraser is the Oregon representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Ms. Fraser 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..