[WSBAPT] Excise tax question

[Eric Nelsen]

I think I'd first try to persuade the lender that it isn't necessary to change title at all. The Promissory Note can be signed by the client and by the LLC as joint and several debtors, and the LLC can do a unanimous consent resolution to execute a DOT securing the loan. From the lender's perspective, they would be fully protected in that situation: both client and LLC are obligated to pay, and the full interest in the property secures the debt.

The problem is, I'm betting that the lender is trying to get the loan to fit into a specific box of characteristics so it can be packaged with similar loans, securitized and sold on the secondary market. So they'll probably say no.

Maybe an alternative: Do the QCDs of LLC-to-client and client-to-LLC as "clearing, exiting, and additions to title" exempt conveyances. Your scenario doesn't precisely fit the examples, but a strong narrative attached to the REETA might make it work. Make clear that the transfers are to satisfy the lender only, are transfers of nominal title only and solely for purposes of completing the loan and no transfer of actual beneficial ownership interest is intended or effected. WAC 458-61A-215<https://apps.leg.wa.gov/wac/default.aspx?cite=458-61A-215>.

Support it with an LLC resolution and Member Agreement outlining the reasons for the transfer and with all members' explicit agreement that the transfer of nominal title to client does not actually change ownership interests; expressly authorize and direct the client to execute a Deed of Trust fully encumbering all parties' interests in the real property in security of the loan, and so forth. Bluntly, the idea is to take pains to state that the whole "conveyance" is mummery to please a lender, and record title is going to go right back where it was once the loan is secured.

That's all a guess at a method, by the way--I haven't actually done it. But these days, we are caught between actual real estate laws, and lenders who don't care about the borrower, and only want to check off loan characteristics so they can sell it fast as part of a package.

Sincerely,

Eric

Eric C. Nelsen
SAYRE LAW OFFICES, PLLC
1417 31st Ave South
Seattle WA  98144-3909
phone 206-625-0092
fax 206-625-9040

From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of J Richard McEntee, Jr.
Sent: Friday, March 29, 2019 10:35 AM
To: WSBA Probate & Trust Listserv
Subject: [WSBAPT] Excise tax question

Hello

A prospective client is a member with two others in an LLC. Each owns 1/3 of the member interests. The LLC owns a piece of real property that was financed with a hard money lender. The parties want to refinance the property with a conventional loan. The prospective client is the only creditworthy member of the LLC. As such, the new lender is asking that the property be transferred to the PC's name only. In this situation, it would seem that a transfer to one member of the LLC with a corresponding assumption of debt will be considered payment to the other two members thus subjecting the transaction to excise tax as to the 2/3 debt forgiven. Am I correct?

Now assuming, after the new loan, PC transfers the property back to the LLC, and the property is then/still subject to the deed of trust related to the conventional debt. Is excise tax due again? Is there a way to avoid excise tax on the round trip from LLC to individual, then back to the LLC?

NOTE: apparently the new lender is on board with the deed back to the LLC.

All input is appreciated.

Thank you

Rich

RICH McENTEE
McENTEE LAW OFFICE
3800 Bridgeport Way W, Ste A411
University Place, WA 98466
253.227.9894(m)
jrmcentee at gmail.com<mailto:jrmcentee at gmail.com>

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