In a handful of states including Washington there is a tax that must be paid for the privilege of selling a real property. In Washington State the tax is 1.78% of the sale price.

I have done many sandwich lease deals where I entered into a lease option agreement with the owner, and found a Rent-To-Own tenant that would live in and eventually buy the house.

Let's now say you’ve made it to the closing table with your Rent-To-Own -tenants and are ready to complete the deal. Just do a double or simultaneous closing right? That way your owner never has to know how much you are making on the deal, and you control the closing. If you do a simultaneous closing in Washington, you will pay the excise tax 2 times. In other words you will not pay just 1.78%, but you will pay 3.56% or $3560 per $100,000 based on the sale price. It will be assessed at the transfer to you then again at the transfer from you to your tenant buyer. The reason I say YOU will pay it twice, is because the owner will not generally be willing or able to pay their portion of the transfer tax, and you will certainly pay your portion in transferring it to the tenant buyer.

For me it is hard enough to choke down the cost of paying it once, but twice would break some deals. It is like taking the cherry off the top of my ice cream sundae. But none the less there are basically 2 options.

1. Do a double closing or simultaneous closing
2. Have your Tenant Buyer close directly with the Owner and you get paid out of Escrow

Both options have their benefits. By doing a double closing, this isolates your tenant buyers from the owners, and the owners never know how much is actually being paid for the property. This is helpful because sometimes there are hard feelings at the end if the owner feels you are making too much on the deal. Of course like I mentioned before, there is that pesky double excise tax as the downfall to this.

Option 2 is great from a transfer tax perspective because you will only pay it once. The downfall is that your owner will know exactly how much your tenant buyer is paying for the property. None the less I prefer this because I generally make sure the owners know throughout the deal that I expect to make a profit. Although don’t underestimate the power of the owner’s greed in those situations.

If you chose Option 2, here is what you need to know. Your owner will not willingly pay you the money you are owed, so don’t set them up to close with your tenant buyer and expect your owner to come drop off a check to you on a handshake agreement. I have them sign a Deed of Trust essentially putting another mortgage on the property that secures my interest in the deal. Part of the closing will include you completing a Notice of Demand in the amount you expect to receive at closing. Without getting into too much detail, those two documents will ensure you get paid properly for all the work you have done.

Brandon Gadish
Landlord Technology LLC