Letter

Letter

Dear Sir:

My client owns appreciated real estate in Arizona with an adjusted basis of $100,000 and Fair Market Value of $1,000,000. Client's Wife is the trustee of a trust (ABC Trust) for which the children of client and wife are beneficiaries. Wife's parents were the donors who created that trust. The clients is concerned with protecting the real estate from liabilities, and for that reason, he wants to sell the real estate to the trust for its Fair market Value. In order to reduce the impact of taxes, the client wants the sale of the real estate to be an installment sale. The trust would buy the real estate for $200,000 down. Interest only would be paid for each of the next ten years at the rate of 5% per year. Then, at the end of the ten years, the trust would make the final payment of $800,000. The trust currently has $5 million in net assets and it distributes income on those assets (but no principal) to the beneficiaries each year.

Through this letter, the clients are oblige to have your attention towards a matter regarding the payment of tax under the above factual situation has been complained of as being an unfair burden upon the person who contracts to sell property but has to repossess the same, and subsequently enters a second contract of sale.

We are inclined to sympathize with this complaint, especially in a situation where the contract is not performed by the purchaser, and only slight payments have been made by him. However, by chapter 28.45, RCW, which authorizes the imposition of the real estate sales tax (chapter 11, Laws of 1951, First Ex Sess., as amended by chapter 19, Laws of 1951, Second Ex. Sess.), and by the ordinances imposing the tax, the tax is imposed upon every sale of real property in the county. The word "sale" is defined to include not only the actual conveyance or transfer of title or ownership to the property, but also the entry of any contract for such a conveyance or transfer of title. The facts of the instant problem are that an owner of land has entered two contracts for the sale of the land. The statutes and ordinances leave no alternative to the collection of the tax upon the entry of each contract.

Where the owner of real property enters a contract to sell the same and at that time pays the real estate sales tax upon the entire contract amount, but later declares a forfeiture of such contract for a defaulted payment, retakes the property, and enters a new contract for the sale of the property to another party, is the owner again subject to payment of the real estate sales tax upon the entry of the second contract?

The efficiency of property law is largely determined by the costs of the enforcement of property rights. Since litigation is costly and destroys resources, the state should structure a system of property rights in a way to ...