The power of the phone call

On Jan. 12, 2009, a new memo came out from Stuart Thronson, Assistant Director, Special Programs Division of the Department of Revenue with the Subject "Application of the Real Estate Excise Tax on 'Short Sales'."

In this memo he clarified that Real Estate Excise Tax (REET) would not be charged to the Seller based on the amount of debt relief the seller received from the Lender as part of the short sale process. He acknowledged that this relief was something negotiated between the Seller and the Lender and was not a consideration received in some way from the Buyer.

In addition he directed that if, previous to this new "interpretation of the applicable statutes," a seller had "paid REET on the amount of the forgiven debt in a short sale transaction" that he or she "may be entitled to a refund of the excess tax paid." A URL was then provided for applying for the refund.

Copy of original memo: a link will be added here for viewing the original memo in PDF format. It is currently uploading.

Original blog that this updates: "Taxing of Short Sale 'Phantom Income' - Confusing, Unfair and a Misinterpretation"

     Summary: the Washington Department of Revenue (“the Department”) has stated that
    Sellers doing short sales must pay excise tax on the amount of their forgiven debt. As a
    former tax attorney and currently active real estate agent in the State of Washington
    (“Washington”), I oppose this on three grounds-

     (1) It’s a misinterpretation of the applicable Washington Statute.
     (2) It’s poorly thought out and will be difficult to apply fairly (including knowing where
            ‘the buck stops’- seller, buyer, lender or escrow company)
     (3) It’s will have a chilling effect on short sales, including sales already in progress

     How & why the issue was raised

    At a recent meeting of the Escrow Association of Washington (“the Association”), a
    speaker from the Washington Department of Revenue stated that ‘forgiven debt’ to a
    seller in a short sale should be included in computing excise tax owed by that seller.

    In response to a further query by the Association, the Department reiterated its position-

    The Department expects excise tax to be withheld and paid to the state upon
    the closing of a real estate transaction, not only upon the sale price, but on the
    amount of debt forgiven by the lender on a short sale.

    While the Department acknowledges that the sale price is rebuttably presumed to be the fair market value, it cites the language of RCW 82.45.030 to claim that the tax is due also on the amount of any mortgage debt unpaid the the seller [bolding is mine]-

RCW 82.45.030 ** "Selling price," "total consideration paid or contracted to be paid," defined. (1)   As used in this chapter, the term "selling price" means the true and fair value of the property conveyed. If property has been conveyed in an arm's length transaction between unrelated persons for a valuable consideration, a rebuttable presumption exists that the selling price is equal to the total consideration paid or contracted to be paid to the transferor, or to another for the transferor's benefit.  (3) As used in this section, "total consideration paid or contracted to be paid" includes money or anything of value, paid or delivered or contracted to be paid or delivered in return for the sale, and shall include the amount of any lien, mortgage, contract indebtedness, or other incumbrance, either given to secure the purchase price, or any part thereof, or remaining unpaid on such property at the time of sale. ** Items (2), part of (3) and all of (4) are deemed to be non-material and are omitted here for the sake of space. The full provision can be found on the State of Washington’s website here: http://apps.leg.wa.gov/RCW/default.aspx?cite=82.45.030

  First, It’s a misinterpretation of the applicable Washington Statute.  back to top

I believe that the Department is misconstruing the language of the statute.  it does not appear from a more precise reading that “consideration paid” is intended to include consideration paid by the lender, but rather consideration paid by the buyer. 

The reference in the statute to consideration remaining unpaid after closing was adopted in 1993, probably to deal with some of the 1980’s real estate realities-

Seller often carried back a ‘second’ for the buyer, and many times that second was silent (unrecorded).  Additionally, on installment sales of real property a likely second question was whether the tax applied to only the down payment, or to the full purchase price.

It is apparent that these were in fact additional consideration paid by the buyer, and therefore legitimately to be taxed, rather than consideration paid in effect by the lender, as here.

As additional evidence, look at the excise tax affidavit itself. There is no place on to fill in the amount of forgiven debt as part of the consideration paid by the buyer to the seller. Historically is has not been construed to be part of the consideration paid between buyers and sellers. (Instead it is part of the consideration the lender agrees to take from the parties in order to allow the short sale!)

It seems inconsistent for the Department to claim tax owed on the stated sale price when the net value received by the seller is less than what the buyer pays (in the form of seller paid closing costs), and at the same time say excise tax is due on the forgiven debt which is more than the seller receives.

Second, it’s poorly thought out and will be very difficult to apply fairly (or even apply at all!).   back to top

A huge number of sales would be affected: all those short sales currently taking place due to the credit crisis and falling home prices. In a short sale, the seller has no money for closing costs,  the lender is already accepting less than is owed and is the one paying whatever closing costs do get paid.

Just try explaining  to a bank employee in Florida who is managing 300 short sales simultaneously, when she's already balked at the payment of the excise tax, that there is additional excise tax due on the forgiven debt. [Most states don’t have excise due on the sale of real estate.]

Then there is the poor escrow officer who is supposed to determine the amount of forgiven debt. He  doesn't even know the full payoff amount that would have been due if this were a normal sale. For example, will the taxable amount include all the late fees, attorneys’ fees, etc. that are usually stacked on top of the actual loan balance?

What does the Department say it will do if the escrow officer don't compute it, collect it, and pay it over?  Put a lien on the property after closing, making the Buyer responsible for it! Imagine finding out after closing that there’s a lien on the property they didn’t know about.

Buyers already hate short sales because they usually have to wait 45 to 60 days (or more!) for the bank to decide whether or not they get the property.  Meanwhile the buyer's loan rate could change, they could pass up 3 other homes that they like…then not be able to purchase this one.  And even without this new issue, lenders often come back with a higher price than the buyer and seller had agreed upon in the earnest money agreement.

Additional questions: back to top

·        Does the Department of Revenue charge excise tax in a foreclosure on the amount of debt unpaid? Answer: No

·        What about when the seller gives a deed is given in lieu of foreclosure? Answer: No again

·        Will the department be charging Washington Mutual excise tax on any amount of debt not paid off by the Chase purchase of WAMU's assets? Or will they lien the property acquired by Chase thereby suddenly increasing the price paid by Chase by hundreds of thousands of dollars?

·        Won’t this drive up the foreclosure rate? Answer: If short sales are made untenable, sellers will eventually be forced into foreclosure, with these negative effects:

o       the seller’s credit rating will be worse

o       the buyer may lose out on their ‘dream home’ (or at least have to wait through the foreclosure process)

o       the lender will incur additional thousands of dollars in legal and various holding costs

·        How will the department treat short sales closed prior to this recent pronouncement? Will the title and escrow companies be liable to the sellers or buyers who find out years later of their increased liability? Answer: nobody knows

·        Is it fair for the buyers and sellers who weren't “found out" (because  the escrow companies followed what they believed to be the law) to get more favorable treatment than those who close their short sales from now on? Answer: probably not

Third, it will have a chilling effect on short sales. back to top

Even if the Department’s construction of the consideration paid definition were to be upheld, it is obvious that the current economic times demand a different result.  At all levels of government, these unusual times call for unusual measures.  Vancouver’s firefighters have foregone a pay raise they are entitled to under the law.

Even the Internal Revenue Service has recognized the possible economic dangers in this approach. It has applied at least a temporary rule not to tax as income the debt forgiven on a short sale—which the IRS prior to last year always enforced in the absence of an accompanying bankruptcy.

While we understand the need to apply the law fairly, and we know the state is hurting for money just like everyone else, the Washington Department of Revenue should not and must not continue to insist on additional excise tax due on the “phantom income” of debt forgiveness in a short sale transaction at this time.  back to top

Should You Build in Clark County Washington?

There are really three questions here-

1. Should I be considering new construction at all? 
   
2. If so, do I want to have something custom-built or do I want to buy a "spec" helps?
3. Why would I buy or build in Clark County vs someplace else?

New vs. Existing: There are many for whom newness does not matter; all they are looking for is a comfortable place to live for themselves and their family  regardless of its age.  There are others who will end up buying a new or recently-built home because it's the best way for them to get the amenities they require.  Finally, they are are the buyers who have the same feeling that many automobile buyers have: "I want one that nobody else has owned or used."  Most of these buyers will end up looking at either building or buying something that's relatively new.

On the other hand, there are buyers who have some friend or relative who had "a bad experience building."  To them, new construction is to be avoided if at all possible.  Some people are put off by the expenses of new construction, especially if they are inclined to upgrade all the components of the home as it's being built.

For the complete report, please go to my website report "New Construction: Should You Take a Second Look at Clark County Washington?"

 

Yes You Can...

Sell a house in less than 30 days in today's market. Here's how-

1. Price it right. So how do you know?  Check comparable 'active,' 'pending' and recently 'sold and closed' properties that are similar to yours. Compare them on a dollars-per-square-foot basis. If the 'sold and closed' properties average $150/sf, the 'pending' ones average $140/sf, and the 'actives' average $130/sf- you HAVE to go to the low end if you HAVE to sell. It's that simple. All things being equal, you want to be the least expensive house in your market segment if you must sell. Otherwise you'll be trying to 'chase' the market by doing frantic price reductions while the houses priced correcting are selling around you.
   
   
2. Make it so clean and shiny that it sparkles. Scrub everything and have carpets and windows professionally cleaned. Trim shrubbery away from the house. And if it's in front of a window, trim it lower than the window sills.
   
   
3. Eliminate 1/3 of the furniture and 1/2 of everything else. Store it or get rid of it. Including the myriads of sentimental photo, travel and trophy collections that make the house feel like yours. Your want the house to feel roomy. You want the buyers to easily imagine it as theirs (with minimal 'mental subtracting' of your lifestyle).
   
   
4. Change colors as needed. If anything is an ugly or outdated color, change it. Ask your agent and believe what they tell you.
   
   
5. Regarding price, ask the right people the right questions...then act on what you learn. Like it or not, it's the market place that sets prices. The marketplace is cruel. It doesn't care what you 'need in order to buy another place you like.' It isn't swayed by how much money, love, time and energy you've put into it. If your mechanic or hairdresser tells you your property is worth 20% more than your agent tells you...sell it to them on the spot before they regain their sanity!
   
   
6. Allocate money for staging. Your house will sell faster and for more money professionally staged. And don't waste your time with "it wasn't staged when we bought it and we liked it just fine." The current real estate market is the worst we've seen in a long time. Many houses that don't sell in the first month are sitting for as long as a year with no offers.
   
   
7. Make your house easy to show. This isn't the time to play hard-to-get. There aren't remotely enough buyers to buy all the houses for sale in your city right now. Say 'yes' when the agent calls and asks if she can show it between 5 and 6 PM today. That's the time she and her out-of-town buyer are going to be in your area. At 7 PM they're going to be across town. Tomorrow the buyer's going to be back in Montana. No one asks to show your house at dinner time if they have a choice. They'd rather be home eating dinner, too. (And with today's gas prices, they'll be choosing efficient routes with as little doubling back as possible.)
   
   Unless it's medically impossible, plan to be out of the house during the time the buyers will be visiting. They'll be more likely to take their time and really think about how it will work for them if they and the agent are the only ones there. Before leaving, turn on every light you can find in the house (even if it's the middle of the day in Phoenix). And leave the blinds and drapes open.
   
   
8. Special caveats for vacant houses. Having the utilities turned off is generally a false economy. If buyers have to walk through a dark, freezing (or boiling) house, they're not going to stay around as long or feel as good about the house as if it seemed more 'normal.'  Also, clean the house regularly to prevent 'dead fly syndrome' from setting in. And tend to the yard periodically.
   
   
9. Choose an agent who pulls out all of the marketing stops from the get-go. Your house should appear on multiple national websites, including both a 'virtual tour' and multiple interior and exterior photos. Nowadays 84% of all buyers do most of their property searching on the Internet. And most won't even consider properties without enough photos to give them a good sense of what the house and grounds have to offer.

Watch for my next blog posting on "Advice you never thought you'd hear from a real estate agent."

© 2008 Janine Hook Pierson and Chuck Pierson

I recently assisted a buyer to purchase a home. The house had been previously listed in the last couple of months for $15,000 less than my buyer is now paying. Why didn't it sell while it was listed for so much less? It's possible the house was cluttered. I don't know for sure since I didn't have a buyer for it during that agent's listing of it. So I hadn't seen the interior previous to showing it to my buyers. So what's different now? The house in now bank-owned due to foreclosure. So they might have had it cleaned out if it needed it. Other than that, the house hasn't been repainted, redecorated or 'staged' at all. Here are some significant changes that I am aware of- The commission % to a buyer's agent has been increased. The new agent is easy to work with. By contrast, the previous agent has a reputation for- failing to return other agents' phone calls trying to sell his/her own listings instead of working cooperatively with other agents to secure the best possible sale for the seller. All showings had to be arranged by reaching that hard-to-reach listing agent! When listed this time for nearly $12,000 more, there were 3 offers in the first 3 days! Usually we say having the price and property condition right are the 2 keys to selling. This illustrates a third key- a good listing agent!