Transfer of real estate property, whether through gifted donations or sale, is subject to state, federal and, in many cases, local taxes in the state of Washington. Local real estate transfer taxes are based upon the sale price of the land, so gifting it to another exploits a loophole in state tax law. Taxpayers will face gift taxes, however, for transferring real property in this manner.
Washington Real Estate Transfer Tax
The State of Washington imposes a 1.28 percent tax on the sale value of real estate, and nearly all counties and municipalities levy an additional tax on real estate sales. Local real estate transfer taxes usually range between 0.25 and 0.5 percent in most areas, although in San Juan County, it reaches 1.5 percent. Municipal real estate transfer taxes are levied in addition to state taxes, so sellers may be liable to up to 2.28 percent of the sale value of real estate. Gifting real estate bypasses these excise taxes.
Federal Gift Tax
Although a landowner may pass land to another person without paying state transfer taxes, he will face federal gift taxes, which the Internal Revenue Service collects on any transfer of property valued at more than $13,000 between two people over the course of a year. The taxable amount is based upon fair market value, not the sale price, so property valuations such as property tax assessments or the sale price of similar property may be used to calculate the gift tax amount, and, in most cases, the person gifting the property is liable for the taxes rather than the one receiving it. Gift tax rates are graduated depending upon the gift’s worth.
State of Washington Gift Tax
Federal gift and estate taxes allow a discount when states levy a local tax on the same transfer of property equivalent to the amount collected by the state to a limit specified each tax year. In essence, this tax code allows states to levy property transfer taxes without increasing the taxpayer’s overall tax burden, as these taxes are simply deducted from the tax owed to the federal government. Washington’s gift tax exploits this situation, assessing the maximum deductible amount on property transferred. From a practical point of view, taxpayers see no bottom-line difference in gift tax amounts because Washington collects taxes that would otherwise go to the IRS.