Watch for Those Pesky Excise Taxes

• April 21, 2010
• Paul Neiffer

 

I have taken a couple of days off from writing a post due to tax season ending on April 15.  As a CPA, you tend to build up a large adrenalin rush until April 15 and then it takes a big dump and all you want to do is nothing and get a lot of sleep.  I now seem to be recovered and should get back to my normal posting schedule.

I also want to let my readers know that I will be taking my BMW motorcycle on a cross country trip beginning on or around May 10 and returning on or around May 23.  I will be traveling from Washington state to a wedding in Kansas.  From Kansas I am going to Los Angeles and then heading north back to Yakima.  I will try to write a few posts about the trip while I am gone assuming I get good access to a computer.  These posts will probably be more of a personal nature, but I will try to incorporate some tax or farming issues if they are pertinent.

Now for the blog post.

About a year ago, I had a client that was involved in a small sub-division in the local area.  He was a 50/50 partner with another person.  The lots were listed for sale for about $45,000, however, the project was not quite complete.  With the downturn in the economy, the client decided to sell his 50% interest in the LLC back to his partner.  The consideration was no cash and the other partner would take over the debt.

The client went on his merry way until he got a call from the State of Washington wanting the excise taxes that he owed on the transfer.  In our state (and there are many others just like it), if you sell a 50% or more interest in an LLC during a 12 month period, then you owe the real estate excise tax on the full fair market value of the property excluding any debt.  Even though you only sold 50%, you owe the excise tax on the full 100% of value.

In this case, there were let’s say about 50 lots advertised at $45,000, so the state assessed the excise tax of about 1.9% on $2,250,000 or about $42,750.  He had to pay  the whole excise tax even though not one of the lots had ever sold and the actual value of each lot was probably closer to $25,000 at that time.

Now, what I think is even more of money grab by the state is when the lots are actually sold, then the excise tax of 1.9% is, you guessed it, owed again.  There is no credit to offset any of the tax previously paid.

I now recommend that any of my clients that are involved in a 50/50 LLC and want to get out of the LLC, to only sell 49.5% of the LLC and wait over a year to sell the remaining .5% interest.

For many of our farmers who are doing succession planning to their children, they need to make sure to watch out for these excise taxes.

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