The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Watch Those Pesky Excise Taxes
Apr 21, 2010
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.