Consider This – Death and Taxes

I could not resist the headline. As they are the only thing sure in life it makes sense to write about them. My experience gives me enough knowledge to paint a picture using broad brush strokes. Anyone thinking of purchasing real estate should discuss the purchase with their legal and tax professionals.

Let’s start with a brief note about death. To be specific, let’s talk about what happens to your real property when you die. Simply put what happens depends upon where you live and how you hold title to your property.

State and federal law govern how the estate of the deceased is distributed and taxed. If you live in one of the nine community property states (AZ, CA, ID, LA, NV, NM, TX, WA or WI) and have a surviving spouse, most likely the property will automatically convey to the surviving spouse. If you place the property into a trust the trust may dictate what happens.

If you do not live in a community property state, or have no surviving spouse and the property is not in a trust, then most likely your property will need to go through probate. State law governs how the probate is handled. Some states have an inexpensive, streamline probate process. Other states have an expensive and lengthy probate process. Regardless of the state, any probate may become lengthy and expensive if there is a dispute among the survivors. This is part of the reason why it is important to create a will.

None of us want to think about death. And with the myriad of decisions to make during the purchase of real property this important issue may not receive the attention it deserves. If you have children from a previous marriage, a large estate or any other unusual circumstance it is in your best interest to discuss with the title officer or your tax/legal professional the method of holding title which will work best for your situation. You could also perform an internet search on how to hold title. Each state differs slightly so be sure that any article you read pertains to the state in which the property resides.

Moving on to taxes. As I’m sure the end result of reading about taxes is similar to that of having a lobotomy I’ll avoid lengthy discourse on the subject and limit the discourse to taxes relevant to real estate in San Juan County, Washington.

Since we were on the subject of death you should know that estate taxes will depend upon the total value of the estate including real and personal property. According to the IRS website, as of 2015 the federal tax applies to estates in excess of $5,430,000. The tax will not apply to an estate if it is left to a spouse or a federally recognized charity. Check with the state in which the property resides to determine the threshold for filing state estate taxes. According to the Washington State Department of Revenue as of 2015 that threshold is $2,054,000.

Property Taxes in San Juan County are paid semi-annually with the first half due on April 30 and second half due on October 31. The tax year runs from January 1 to December 31.

Typically the seller of real property will pay property tax to the date escrow closes. The buyer will pay from close of escrow to the semi-annual due date. These prorations are noted on the HUD1 closing statement.

If taxes have been paid on time then property taxes are pretty much a non-issue. Things become a little more complicated when the seller of real property has not made timely payments. This is where the preliminary title report becomes of value.

The purchase contract can provide a title review contingency. This contingency will give the buyer an opportunity to review the status of tax payments. If taxes are in arrears it would be a good idea to check with the escrow company to verify that there are sufficient proceeds from the sale to pay any delinquent property tax.

If the escrow closes in late March or late October I suggest the buyer contact the San Juan County Tax Assessor’s office to make sure any new tax bill is mailed to the correct name and address.

The San Juan County Land Bank Tax is paid each time the property sells. The tax is due at the close of escrow. It is typically charged to the buyer at a rate of 1% of the sales price of the property. All tax funds received go into a fund which is used to “preserve the natural heritage of the San Juan Islands”.

Washington State Excise Tax is also paid each time the property sells. The tax is due at the close of escrow. It is typically charged to the seller at the rate of 1.28% (1.78% for property within the city limits of Friday Harbor) of the sales price of the property. According to RCW 82.46.030 one percent of the funds are put into the county current expense fund and the remainder into the county capital improvements fund. Friday Harbor’s additional .5% tax funds are to be put into the municipal capital improvement fund.

FIRPTA, aka the Foreign Investment in Real Property Tax Act, is a withholding of tax on the dispositions of real property interests within the United States. It is a federal as well as a state (for those states with income tax) tax on the proceeds from the sale of real property by those persons who are NOT selling a principle residence and are NOT a resident of the state or the US. In other words, if you are selling your principle residence you are exempt from these taxes.

The seller of real property may be subject to both the Excise and FIRPTA taxes but it is the buyer of the real property who is responsible for withholding. Normally the escrow or the closing agent will perform the tasks of withholding and the filing of the proper tax forms. It is in a buyer’s best interest to use a qualified closing agent and to check with that closing agent to verify that the seller has completed the appropriate FIRPTA waiver or that the closing agent is prepared to withhold FIRPTA. Also check to ensure that there are sufficient net proceeds to pay any tax due.

Tax deductions (a favorite phrase) are one of the many advantages of owning real property. If you are ready to take advantage of some of the deductions available call or text me. I’ll get you started down the path to ownership.

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