Posts tagged Real Estate
New REET Rate Structure Begins January 2020

In May of 2019, Governor Jay Inslee signed Senate Bill 5998, which will result in a graduated tiered scale for real estate excise taxes (“REET”) that will replace the previous flat state REET tax of 1.28%.

The following tiered structure takes effect on January 1, 2020:

  • 1.10% – Portion of selling price less than or equal to $500,000

  • 1.28% – Portion of selling price greater than $500,000 and equal to or less than $1.5 million

  • 2.75% – Portion of selling price greater than $1.5 million and equal to or less than $3 million

  • 3.00% – Portion of selling price greater than $3 million

Sales of timberland or agricultural land will remain subject to REET at a 1.28% state tax rate and may be subject to a local REET in addition to the state REET.  

Also included in this legislation is the following:

  • Beginning in 2022 and every fourth year thereafter, the REET thresholds may be adjusted to reflect the lesser of the growth of the consumer price index for shelter or 5%.  If the growth is equal to or less than 0%, the current selling price threshold will continue to apply. 

Another significant result from the legislation relates to the determination of a transfer of a controlling interest.  In Washington, REET applies to the direct transfer of real property, as well as the transfer of a “controlling interest” in an entity that holds real property.  For REET purposes, a transfer of a controlling interest is the combined transfer of 50% or more of the interests in an entity that owns real property.  This legislation changes the time period for determining whether a controlling interest has been transferred (triggering REET on the transfer of certain business interests) from 12 months to 36 months.  The legislation also requires the Washington Secretary of State to adopt rules requiring any entity that is required to file an annual report for the transfer of at least one-third of a controlling interest in an entity.

The result of these changes will be an increased number of transactions subject to REET, even though the overall 50% or more threshold to constitute a transfer of a controlling interest is not changing.

Please contact Michelle A. Green at JDSA Law with any questions about this new legislation or call (509) 662-3685.

Opportunities Abound in Local Opportunity Zones

Congress made several significant changes to the individual income tax when it passed the Tax Cuts and Jobs Act of 2017. The creation of the Opportunity Zone program is among these changes. This law, codified in the Internal Revenue Code, creates tax breaks and incentives for those who invest their money into designated “opportunity” zones. In short, the Opportunity Zone program is an economic development tool designed to spur economic development and job creation in distressed communities. An Opportunity Zone is a designated economically-distressed area where new investments, under certain conditions, may be eligible for preferential tax treatment. Our local officials in Chelan and Douglas County proactively sought the designation of a large number of properties within each of the counties as Opportunity Zones, which requests were ultimately approved by Governor Inslee among a total of 139 census tracts approved as Opportunity Zones in 36 counties within Washington. You can find these properties through this mapping feature.

In order to invest within an Opportunity Zone and qualify for these new tax breaks, an investor must first form a Qualified Opportunity Fund (“QOF”), which can be either a partnership (including limited liability companies) or a corporation. This fund is the vehicle which then makes the investments in the eligible property located in an Opportunity Zone. The tax benefits for these investments are reminiscent of the benefits associated with 1031 exchanges, but with the potential for even more advantageous tax breaks.


Deferring Tax on Capital Gains

Investors into Opportunity Zones can defer tax on prior capital gains invested into a QOF until the earlier of the date on which the investment in the QOF is sold, or December 31, 2026.

  • If the QOF is held for longer than five years, there is a 10% exclusion on the deferred gain

  • If the QOF is held for longer than seven years, there is an additional 5% (for a total of 15%) exclusion on capital gain

  • If the investor holds the investment in the QOF for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value – meaning that there would be no capital gains tax levied at all.


Requirements

In order to take advantage of the deferral, there are a few requirements.

  • The 180-Day Window. The investment into the QOF must be made within 180 days of the sale of other property. An investor cannot utilize the Opportunity Zone program if they already have the cash and simply want to invest. There has to be a triggering sale of property with capital gains and then a reinvestment of those funds within the 180-day window.

  • The Fund. The fund has to be set up in accordance with the Internal Revenue Code and the recently released proposed regulations. As noted above, the fund can be a partnership tax entity or a corporation. The QOF must designate a fund manager.

  • The Investment. The QOF must use at least 90% of the funds it receives to invest in qualifying property within an Opportunity Zone. The investment must improve existing property and/or consist of a new build. The investment can also be made into a new or existing business that is located within an Opportunity Zone.

  • The December 31, 2026 Window. The capital gains exclusion incentives are based on the length of time that the investment is held and time-capped as of the end of 2026. An investor can still invest in 2019 in order to hit the seven year window of time for exclusion of capital gains.


Conclusion

The tax breaks associated with the investment into Opportunity Zones could have a lasting impact on many taxpayers. An investor does not need to create their own fund and there are many funds all over the country, which are currently formed and trying to raise capital. If you are a property or business owner that has been considering a sale that would trigger capital gains, now may be a great time to sell and reinvest those funds into a QOF fund. On the flip side, if you are a property or business owner located in an Opportunity Zone, you should consider leveraging these tax incentives to get new investors. The Opportunity Zone regulations are complex. Investors considering the Opportunity Zone Program should consult with their attorney and tax adviser to ensure full compliance with the rules and regulations in order to achieve the maximum tax benefits contemplated under the Act.

Email Lindsey J. Weidenbach or Michelle A. Green at JDSA Law for assistance or call (509) 662-3685.

Real Estate Transactions in the Cannabis Industry

For Washington and Oregon


As long as the transaction doesn’t involve bank financing, law firms with real estate experience and licensed Limited Practice Officers (LPO) can close real estate transactions.

Approximately one year ago... 

The title companies around the country were advised to stay away from the cannabis industry.  JDSA continues to stand by the industry to assist with creative solutions to these hurdles.

Here is a recap with updates that may impact you and your business:  

Recap:  2017 Title and Escrow Changes

On April 18, 2017, national title companies such as Fidelity National Title Insurance Company, Chicago Title Insurance Company and Alamo Title Insurance received Underwriting Bulletin No. 2017-RC-04, closing yet another door to the cannabis industry: title & escrow. 

The Bulletin states, if the title company receives any notice from the broker, seller, buyer or anyone else, that the Land is—or will be— used in some capacity for growing, producing, distribution or dispensing of any type of marijuana or marijuana products, the title company is not allowed to:

  1. Be involved in the handling of any escrow or other funds of any type

  2. Issue any type of zoning coverage

  3. Issue title insurance

This 2017 mandate from title & escrow affects anyone who may want to purchase property and rent space to cannabis operations – therefore, this applies to those with no tie to the industry, other than a something as simple as a lease. 

Updates:  2018 Changes  

After the Bulletin was first released, title insurance was available with the inclusion of an exception related to violation of federal law.  The current practice is to disallow the issuance of title insurance altogether.  Additionally, title companies used to provide a marijuana buyer with a list of the subject property’s known encumbrances. However, as of recent, even this request has been denied.

So, why the change?

We were told that the possible reason for the title companies’ sudden change of heart was because of Sean Spicer’s and the Attorney General Jeff Session’s comments on marijuana, and the current administrations unpredictability as to the topic.  This fear of federal enforcement is often used as an excuse by national companies to discontinuing working with the cannabis industry. And considering that the Attorney General repealed the Cole Memo in January 2018, trepidation surrounding the industry has only increased.

What is the industry's reaction?

The cannabis industry has grown accustom to forced creativity in order to simply retain some semblance of normalcy in business.    

Typically, financial institutions acting as lenders require the purchase and sale be closed by a title company.  The borrower has to negotiate a very unusual exception to close a bank-financed transaction outside of a title company.  

The good news is, as long as the real estate transaction doesn’t involve bank financing, law firms with real estate experience and licensed Limited Practice Officers (LPO) can close real estate transactions.

How JDSA can help

JDSA is equipped to close real estate transactions that do not involve bank financing for cannabis businesses in Washington and Oregon. 

These transactions are forced to close without title insurance.  Even though title companies have determined that closing real estate transactions for land that may be used for cannabis growing, processing or retail sale is too risky, JDSA is well-prepared to help ease some of the risk. 

We have successfully closed numerous cannabis real estate and/or cannabis business sales, drafted purchase and sale documents, issued settlement statements and recorded all the necessary transfer documents.  Our JDSA real estate professionals, attorneys and LPOs perform county record searches, utilizing our 70+ years of real estate experience to best fit the cannabis industry member’s needs. 

If you should have questions or need legal assistance with a cannabis real estate transaction, contact Lindsey Weidenbach directly and read up on all the latest Cannabis topics on the JDSA Blog.

All About Transfer-On-Death Deeds

This article discusses the TOD deed features and limitations, and helps to explain why—more than three years after passing of the new law—the TOD deed has not been widely adopted as a planning tool.


In June of 2014, our state adopted a new law allowing for transfer-on-death (“TOD”) deeds, known as the “Washington Uniform Real Property Transfer On Death Act” or “Act”. The Act was intended to simplify your estate planning by allowing you to transfer real property to your family members or beneficiaries at your death outside of probate. This is similar to pay-on-death designations on a bank or investment account.

Previously, almost all real property transfers on death required a probate proceeding. This new law now provides a simpler and (potentially) more cost effective alternative for transferring your real estate at your death without the time or costs of probate.

The TOD deed, however, has its limitations and should be carefully considered in the context of your overall estate plan. It should not be used simply to avoid probate. There are very few circumstances where the benefits of saving administration costs outweigh the benefits of having a will with more defined planning provisions.

1031 Exchange: Is It Right For Me?

With the housing market booming and the economy picking up speed, we are seeing a resurgence in 1031 exchanges. 

A 1031 exchange allows you (the “exchangor”) to defer paying taxes on investment property when it is sold, so long as those proceeds are reinvested into other property of “like kind.”  Tax deference is often advantageous, however, the pros should be weighed against the cons — prior to diving into a 1031 exchange — to ensure the 1031 exchange is right for you. 

The first question: 

Can I benefit from a 1031 exchange? 

You benefit from a 1031 exchange if you are selling investment property, or property that is used in a trade or business, and want to purchase new investment property to replace it. If this is the situation, you can sell the old property and purchase the new property without paying taxes on the sale.  This tax deference is the main benefit of a 1031 exchange. 


If the properties qualify, and are of like kind, the next question: 

What is your basis in the relinquished property, and are the current capital gains rates favorable to a sale? 

If you have a high basis in the property (basis being the difference between the price you purchased the property for and its current fair market value), then you might not want to defer taxes.  It may be more tax efficient to pay the capital gains now, while rates are reasonable, on a high basis.  However, if you have a low basis in the property, it is almost always more advantageous to defer the taxes and go with a 1031 exchange.

In order for your property to qualify as 1031 property for sale (the “relinquished property”), you must have held it for five or more years as an investment or in a trade or business.  Once you sell the relinquished property, you have 45 days to identify new property to purchase (the “replacement property”) which also has to be intended for investment, or for a trade or business purpose.  After the replacement property is identified, it must be purchased within 180 days (around 6 months) from the relinquished property's date of sale.  This is the most common type of 1031 exchange, and is referred to as a forward, delayed 1031 exchange

There are many other types of exchanges and different iterations of the same pattern. For instance:

  • You can sell multiple properties and/or purchase multiple properties.

  • You can first purchase the replacement property and then sell the relinquished property — this is called a reverse, delayed 1031 exchange.

  • If you know exactly what properties you want to sell and purchase, you can sell and purchase simultaneously (or close to simultaneously) through a title company, which is referred to as a simultaneous 1031 exchange.

  • You can sell one property, purchase another and build improvements on it, which is called a construction 1031 exchange.

  • A 1031 exchange even works for large items of equipment.


Before we continue, let’s discuss the requirements: 

What are the requirements of a 1031 exchange?  

  • The primary principal of the exchange is: the exchangor cannot have control over, or access to, the funds during the exchange. If you have access to the funds, the exchange fails and does not qualify for tax deference.

  • A 1031 exchange has to be facilitated by a qualified facilitator, which is defined in the Internal Revenue Code very specifically, but generally means anyone who is a true third party, not related to or an agent of the person performing the exchange (the exchangor).

  • If you’re thinking of selling property that would qualify for a 1031 exchange, contact a qualified facilitator first, to make sure your specific property sale qualifies and to make sure tax deference is right for you, based on the property’s basis and current capital gains rates.

  • The facilitator must be assigned the Purchase and Sale Agreement and must receive the proceeds of the sale of the relinquished property, and will hold the funds in trust until the exchange is complete.

  • If you have already sold the relinquished property, it is too late and you will not qualify for an exchange.

Once you have engaged the facilitator and sold the relinquished property, the facilitator will enter into an agreement to purchase the replacement property, keeping in mind the two time limitations discussed above, and will use the proceeds from the sale of the relinquished property to purchase the replacement property.  The replacement property is deeded directly to the exchangor. Any remaining proceeds are reimbursed to the exchangor, and will be taxable income.


These exchanges are highly technical.  Any misstep of the Internal Revenue Code regulations can lead the disqualification of your exchange.  JDSA has a focused, real estate legal team and regularly acts as a 1031 exchange facilitator.   

Permit-Exempt Wells

New Restrictions from The Washington State Supreme Court

There are new rules regarding permit-exempt wells that will restrict growth in some rural communities.

On October 6th, 2016, the Washington State Supreme Court made a ruling that impacts the responsibilities of counties within the State to review permit-exempt (household) wells in connection with building permits and subdivision applications.

A permit-exempt well is, as the name suggests, a well that does not require a water permit from the Department of Ecology.

The Court’s decision will effectively preclude counties from granting building permits and subdivision applications that intend to rely on household wells that will impair a minimum, in-stream flow (a rule set to protect river and stream flows at sufficient levels for fish). Essentially, if withdrawing water from the exempt well would drop a nearby stream level below minimum flow levels set by the Department of Ecology (Ecology), you can’t withdraw water.

So how does this affect you?

At the time of writing, it remains unclear. Primarily, the decision directs the counties to go beyond the in-stream flow rules adopted by Ecology, and conduct their own analysis when determining legal availability of water for rural development.

The result of this decision in many counties will be burdensome hydrogeology report requirements – even for a basic residential building permit on a rural property. It could mean blanket denials of all building permits and subdivision applications for properties within watersheds that are already fully appropriated. This in turn could mean long delays in receiving building and development permits – if any will be granted at all.

In counties with approved watershed plans that include “reserve water” in anticipation of future growth (such as Chelan County), the impacts of this Supreme Court decision will likely be much less extreme. However, regardless of where you live in our State, the landscape is changing rapidly with respect to water availability.  And, while the topic may be dry (pun intended), the decision has important ramifications for future growth within the State.

You’re probably wondering how this came about.

The Hirst decision arose from a lawsuit filed by a group of environmentalists against Whatcom County, alleging that Whatcom County was not satisfying its obligations under the Growth Management Act (GMA) by granting building permits that intended to rely upon household wells without conducting an independent analysis of water availability. Why? Because the GMA requires counties to ensure an adequate water supply exists before granting a building permit or subdivision application.

In its decision, the Supreme Court stated that an applicant for a residential building permit must produce proof that water is both legally available—and actually available—when the applicant is relying on a permit-exempt well.

For environmentalists, the decision is a big win. The decision squarely precludes the unchecked growth of single-family residences relying on permit-exempt wells in rural areas.  As stated by the Court in the decision, “this is precisely the ‘uncoordinated and unplanned growth’ that the legislature found to ‘pose a threat to the environment, sustainable economic development, and the health, safety, and high quality of life enjoyed by residents of this state.’”

Right now, the net result is counties cannot issue building permits unless there is water actually and legally available.

To learn more about this topic and the details of the ruling, read the full article. To better understand how this Supreme Court ruling may affect your permit application, call us today at JDSA Law.