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Edward McFerran
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Real Estate in Western Washington
Real Estate in Western Washington

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PARENTAL GIFTS TO CHILDREN

Matters of gifting arise in our practice on a continuing basis. Recently a Broker contacted “Legal-Line” inquiring on behalf of parents who were interested in “helping” their son and daughter-in-law to acquire a new single-family residence, but were limited in their opinion by a $14,000.00 gift limitation. The problem was that $14,000.00 was less than they wanted to give and they had heard that gifts above this level were “taxable” and were concerned as they did not want to pay any gift tax.
This is an area of practice that we encounter on an on-going basis. There are plenty of misunderstandings out there on gifting and taxes. Especially now with new tax laws coming into existence, the questions only increase. I hope in this short writing to clarify some of those matters and provide all our readers some tax information that can be valuable for you in your practice.

MORE AND MORE PARENTS WISH TO GIFT FUNDS TO THEIR KIDS TO BUY HOMES
With the increased cost of homes and with more conservative lending standards, it is anticipated that a significant number of parents are going to gift cash to their children to enable them to purchase their first home.

ANNUAL GIFT EXEMPTION IS $15,000.00 PER DONEE IN 2018
This is where we start. The annual gift exemption has been at $14,000.00 since 2013 so many of our readers will remember that number. It is $15,000.00 per donee per year starting now in 2018. This is a long-established exemption to FEDERAL GIFT TAXES. [There is no GIFT TAX in Washington state. There is an ESTATE tax, but no gift tax in Washington State].
This means that each individual can give to EACH DONEE up to $15,000.00 per year with no gift tax and no gift tax return required. So, if a husband and wife wanted to gift to their son and daughter-in-law they could gift a total of $60,000.00 under this rule. A husband can gift $15,000.00 to his son and daughter in law and the same can be said for the wife to gift to son and daughter in law as well. No reporting to the government required.

WHAT IF THE PARENTS WANTED TO GIFT $200,000.00 OR EVEN MORE?
This is the situation we experienced recently in a “legal-line” inquiry that has prompted this weekly update. The parents wanted to gift $200,000.00, but were again concerned about gift taxes. This is a valid concern. However, we have ways of working through this situation with no tax concerns whatsoever.

IT’S CALLED “THE UNIFIED GIFT AND ESTATE TAX CREDIT”
Now that is a mouthful. At the Federal level, each individual has during his or her life a credit that can be used for gifts during life and also for gifts at death. The amount has changed over the years and was, at one time, as low as a million dollars per individual.
With the new tax law coming into existence as this article comes out, the new tax law will change things now for the “better” (at least until 2025 when the new law sunsets). The new law allows an individual approximately $11.2 million in gift and estate tax exemptions and with portability a married couple can exempt $22.4 million in assets against their estate value. For the vast majority of Americans, there is no longer a federal estate tax.

What does this mean? It means that each of us has a credit on the books at the federal government. That credit is now over $11 million dollars that we can use as we may to gift DURING OUR LIFE or UPON OUR DEATH or BOTH!!! For most of the population this amount is well above their asset base and allows a freedom of gifting not realized in the past.

SO HOW WOULD OUR “LEGAL-LINE” PARENTS MAKE THEIR $200,00.00 GIFT?
They wanted to gift $200,000.00 to their son and daughter in law.
First: we would (as above) take advantage of the $15,000.00 per person per year and that would allow the parents to freely gift $60,000.00 with no tax consequences or reporting whatsoever. [Look at the calculations above].
Second: we would (as above) take advantage of the huge federal gift credit and freely gift $70,000.00 by the husband and $70,000.00 by the wife (for a total of $140,000.00) with no gift tax consequences EXCEPT they have to file a gift tax return in the year of the gift, but no tax to pay just an informational return to file. Easy. Quick.

PRACTICE POINTER: If you have parents out there thinking of gifting, it is a marvelous way to help the kids get into their first home. They need NOT be focused on the limitation of the $15,000.00 rule. We are happy to consult and assist parents in utilizing their “Uniform Federal Gift and Estate Tax Credit. Just call our office.
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CAPITAL GAINS TAXES AFTER THE NEW TAX LAW IS IN EFFECT

We have had many calls from clients of our fellow Brokers out in real estate land asking about the effects of the new tax laws coming into effect this next year on capital gains and real estate investment. There has been so many articles and commentators out there talking today that a few pieces of information on how the tax law changes can affect real estate investors.

TAX DEFERRED EXCHANGES ARE ALIVE AND WELL, THANK YOU, AFTER THE NEW TAX CHANGES

You may not know this, but Section 1031 tax deferred exchanges were potentially on the chopping block as the Congress looked at tax law changes. While in existence since 1921, many politicians looked to exchanges as enhancing wealth of real estate investors and looked to take that away. At the end of the day, Section 1031 exchanges are with us, but with a major change.

PERSONAL PROPERTY TAX DEFERRED EXCHANGES WERE ELIMINATED FROM TAX DEFERRAL

There are TWO (2) types of tax deferred exchanges: One for personal investment property; one for real estate investment property. Our readers are certainly aware of real estate exchanges, but you may not
be aware of personal property exchanges. THEY ARE HUGE!!! However, they involve fleet leases of vehicles; aircraft, oil and gas mine leases and the like.

In short, these types of exchanges have been eliminated. They are gone. So many have called our office believing that all exchanges are gone that we make it clear here. REAL ESTATE tax deferred exchanges are alive and well after the new law changes. We continue as we have before. Again, REAL ESTATE tax deferred exchanges are alive and well after the tax law change.

CAPITAL GAINS TAX MATTERS REALLY REMAIN THE SAME AFTER THE NEW LAW CHANGE

Again, nothing has changed in the basic capital gains tax calculations because of the law change.

Let us begin with long-term capital gains. Long-term capital gains are still defined as gains made on assets that you held for over a year, while short-term capital gains come from assets you held for a year or less. Long-term gains are taxed at rates of 0%, 15%, or 20%, depending on your tax bracket, while short-term gains are taxed as ordinary income.

3.8% OBAMA-CARE SURCHARGE STILL APPLIES!!!!... WAS NOT REPEALED!!!!!!

Also, for both types of capital gains, it's worth noting that the 3.8% net investment income tax that applies to certain high earners will stay in place, with the exact same income thresholds. This is part of the Affordable Care Act, which, Congress has not successfully repealed or replaced, so this tax remains.

The long-term capital gains tax rates of 0%, 15%, and 20% still apply. However, the way they are applied has changed slightly. Under previous tax law, the 0% rate was applied to the two lowest tax brackets, the 15% rate was applied to the next four, and the 20% rate was applied to the top bracket.

Under the Tax Cuts and Jobs Act, the three (3) capital gains income thresholds don't match up perfectly with the tax brackets. Instead, they are applied to maximum taxable income levels, as follows:


Long-Term Capital Gains Rate Single Taxpayers Married Filing Jointly Head of Household Married Filing Separately
0% Up to $38,600 Up to $77,200 Up to $51,700 Up to $38,600
15% $38,600-$425,800 $77,200-$479,000 $51,700-$452,400 $38,600-$239,500
20% Over $425,800 Over $479,000 Over $452,400 Over $239,500
Data source: Tax Cuts and Jobs Act.

If you look at the tax bracket charts later in this guide, you might notice that these thresholds are based on the previous tax brackets. In other words, your long-term capital gains taxes in 2018 will be virtually the same as they would have been if no tax reform bill was passed.

DON’T FORGET THAT SHORT TERM CAPITAL GAINS ARE STILL TAXED AS ORDINARY INCOME!!

On the short-term capital gains side, short-term gains are still considered ordinary income, so the effect is more obvious. If your marginal tax rate has changed, your short-term capital gains tax will change as well.







For comparison, here are the newly passed 2018 tax brackets:

Marginal Tax Rate Single Married Filing Jointly Head of Household Married Filing Separately
10% $0-$9,525 $0-$19,050 $0-$13,600 $0-$9,525
12% $9,525-$38,700 $19,050-$77,400 $13,600-$51,800 $9,525-$38,700
22% $38,700-$82,500 $77,400-$165,000 $51,800-$82,500 $38,700-$82,500
24% $82,500-$157,500 $165,000-$315,000 $82,500-$157,500 $82,500-$157,500
32% $157,500-$200,000 $315,000-$400,000 $157,500-$200,000 $157,500-$200,000
35% $200,000-$500,000 $400,000-$600,000 $200,000-$500,000 $200,000-$300,000
37% Over $500,000 Over $600,000 Over $500,000 Over $600,000
Data source: Joint Explanatory Statement of the Committee of Conference.


And, here are the previous 2018 tax brackets (which were announced by the IRS but will not go into effect):

Marginal Tax Rate Single Married Filing Jointly Head of Household Married Filing Separately
10% $0-$9,525 $0-$19,050 $0-$13,600 $0-$9,525
15% $9,525-$38,700 $19,050-$77,400 $13,600-$51,850 $9,525-$38,700
25% $38,700-$93,700 $77,400-$156,150 $51,850-$133,850 $38,700-$78,075
28% $93,700-$195,450 $156,150-$237,950 $133,850-$216,700 $78,075-$118,975
33% $195,450-$424,950 $237,950-$424,950 $216,700-$424,950 $118,975-$212,475
35% $424,950-$426,700 $424,950-$480,050 $424,950-$453,350 $212,475-$240,025
39.6% Over $426,700 Over $480,050 Over $453,350 Over $240,025
Data source: IRS.

APPLYING SHORT TERM ANALYSIS

For example, let's say you're single and have taxable income of $50,000 per year. If you buy a piece of real estate and sell it a couple of months later for a $2,000 profit, you would have to pay tax at a rate of 25% under the previous tax brackets, while the new tax brackets give you a lower 22% marginal tax rate. This would result in tax savings on your short-term sale of $60.


BOTTOM LINE……………. A LOT OF THE SAME…… EXCHANGES ALIVE AND WELL

While nothing significant changed in the capital gains tax structure, or in the long-term capital gains tax rates, your 2018 short-term capital gains tax could change because of the new tax brackets. Generally, lower marginal tax rates and different income thresholds for most tax brackets combine to produce a potential short-term capital gains tax cut for many Americans.



In a nutshell:

*********Capital gains tax still with us
*********Brackets can have a slight impact
*********3.8% surcharge NOT repealed
*********Tax deferred exchanges for real estate alive and well
*********Can defer capital gains tax (both short term and long term)
*********Exchange can eliminate 3.8% surcharge obligation
*********Personal property exchanges eliminated by new law.
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WHAT IS THE APPROPRIATE DEED TO USE IN AN DECEASED ESTATE SALE CLOSING?

This has been a question that our firm has been involved in on many occasions and was the source of a call just last week from a local Broker over on the Eastside seeking clarification and confirmation.

We represented a while back an estate that was sued because it used the incorrect deed at closing. One of the issues was whether the Listing Broker had any liability for making sure the proper deed was utilized for that sale.

The facts are not that complicated:

****Seller was an estate of a deceased in King County, Washington. Personal Representative had been appointed appropriately by the court and had full power to sell the property without any further intervention of the court.

****Personal representative had never physically seen the real property and, in fact, lived in another state. Listing Broker appropriately listed the property for sale.

****Purchase offer came through by a cash purchaser and closed on that sale in escrow with estate conveying the real estate to the purchaser by Statutory Warranty Deed. Life was good. No problems.

****Purchaser, in anticipation of building fences along another border of the subject property, had the whole property surveyed only to find out to their initial dismay (and subsequent delight) that a forty (40) foot strip along the whole 480-foot boundary line had been adversely possessed by the neighbor and there was in place a fence there and all elements of adverse possession had been met years earlier. That 40ft x 480ft area had been adversely possessed by the adjoining land-owner.

****The purchaser never even imagined that property was part of the purchase, but it WAS INCLUDED in the legal description in the Statutory Deed and was a basis for a claim of breach of warranty of title against the estate and the escrow company.

****The escrow/title company was dismissed from the lawsuit as they told the court that they closed the real estate transaction according to the Purchase and Sale Agreement and that since it said (as contained in the state-wide forms) to use a Statutory Warranty Deed (and they did) that they should be dismissed. They were dismissed and rightfully so.

****The estate had, by Purchase and Sale Agreement, agreed to sell the real property. If they had not used a Statutory Warranty Deed, but a PERSONAL REPRESENTATIVE’S DEED, which is appropriate, then the extent of warranties offered would be far less reaching. The estate could purchase the land from the adversely possessing party in settlement of the lawsuit. That cost the original Estate seller a substantial amount of money.

****The estate looked to its Listing Broker to explain why the Listing Broker in taking a listing for an estate sale of property did not change by Addendum the type of Deed to the one appropriate for that type of transaction. The Broker and estate settled that issue. Was the Listing Broker negligent? I think so?

PRACTICE POINTER: In any transaction where you are representing the seller and the seller is an estate of a decreased person, make certain that you draft an appropriate Addendum changing the deed specified in the statewide forms to a Personal Representative’s Deed. Quick. Easy. Easy to explain to the buyer and their broker. This is the appropriate deed used in decreased estate transactions.

GOOD NEWS!!!! You now have your escrow and title company also looking out to protect you (as they protect themselves as well). You see, until last year a Personal Representative Deed had to be prepared by an attorney. Now your friendly LPO at your escrow dept. can draft it as part of their Limited Practice Officer’s license. That’s right. It is now one of the LPB approved forms for LPO’s to choose and prepare. This is good news.


PRACTICE POINTER TO LPO’ READERS: I would focus on requiring an Addendum every time it is appropriate as I am not convinced that you are relieved of liability especially now with the ability of an LPO to prepare this deed. Escrow folks need to be vigilant of this Deed requirement as well.


THE MATTER OF THE CASE OF THE PASSAGE OF STATUTES OF LIMITATIONS (A CASE STUDY)

Recently, our office was successful in eliminating a second mortgage lien from a King County property because it was unenforceable under the statute of limitations. In that case, the borrower defaulted on their second mortgage obligation around 2008. In response, in 2009, the second mortgage holder elected to “accelerate” the second mortgage debt by calling the full amount of principal due. However, despite accelerating the debt, the second mortgage holder did not commence any sort of formal collection on the note or foreclosure under the deed of trust for over six (6) years.



After reviewing the borrower’s loan documents, communications from the second mortgage holder; and the borrower’s payment history, our office filed a lawsuit in King County Superior Court for Quiet Title seeking a Court Order removing the second mortgage deed of trust from the property and cancelling the second mortgage debt based on an elapsed six (6) year statute of limitations period.

After being served with the Quiet Title Complaint and reviewing the loan history, the second mortgage holder conceded that enforcement of the second mortgage note and deed of trust were barred by the statute of limitations and consequently removed the second deed of trust from the property and cancelled the second mortgage debt.

By taking the time to fully review and analyze all legal issues and possible defenses before commencing the lawsuit, our office would be able to achieve our client’s goal in a cost-effective matter. Below, is a brief description of the various legal issues involved in that case:

First, what is the applicable statute of limitations period? In legal proceedings, the statute of limitations timeline depends on the nature of the claim. In Washington, there is a six (6) year statute of limitations on written agreements including promissory notes and deeds of trust. RCW 4.16.040(1).

Second, when does the statute of limitations period begin to run? In general, the statute of limitations period starts to run when the claim “accrues” or when the claimant has the right to apply to the Court for relief.

For promissory notes and deeds of trust, the statute of limitations period begins to run when the promissory note becomes due. Typically, this occurs at the note’s maturity date. Most mortgage promissory notes are installment notes for a term: the borrower will make a payment once a month for a period until the note is paid in full by a certain date (the maturity date).

However, in the above case, the second mortgage holder elected to “accelerate” the amount owed which changes the typical statute of limitations analysis. Whether “acceleration” occurs is a legal issue which requires fact specific analysis. However, there are Washington State and Federal Court decision which provide guidance. See 4518 S. 256th, LLC v. Karen L. Gibbon, P.S., 195 Wn. App. 423, 434-35, 382 P.3d 1 (2016); Fujita v. Quality Loan Servs. Corp. of Wash., 2016 WL 4430464 (August 22, 2016). In the above case, by accelerating the debt, the second mortgage holder caused the statute of limitations to begin to run in 2009 rather than the note’s maturity date.

Finally, are there any defenses to the statute of limitations claim? The most common defense is “tolling” which occurs when the claimant takes some affirmative action which results in the statute of limitations period to pause for a period. In the above case, there was no “tolling” occurred, however, a mortgage holder can toll the statute of limitations period by issuing a notice of trustee’s sale. See Bingham v. Lechner, 111 Wn. App. 118, 45 P.3d 562 (2002).

Every case requires detailed fact specific analysis before venturing into Court. Our office offers one hour consultations at $150 in which you, or your client, can meet with one of our experienced attorneys to review your specific situation and develop the best legal strategy to obtain your goals. To schedule a consultation please call (253) 471-1200.

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