New Capital Gains Tax and The Impact on Real Estate in Washington State

New Capital Gains Tax and The Impact on Real Estate in Washington State

Last month, on April 25, the Washington State Legislature passed a new bill that adds a seven percent tax on long-term capital gains over $250,000. The new tax is to be effective on January 1, 2022, and is expected to raise $415 million (or more) to fund K-12 education in Washington State. It is noteworthy that a group has already filed a lawsuit in Douglas County to strike down the new law, claiming the bill is unconstitutional, so it is possible this bill will not go into effect next year. However, if the bill is implemented in the new year, here is what you can expect.

Real Estate Exemption

While the bill’s primary targets are profits taken on financial transactions, real estate transfers do not appear to be wholly exempt. Transactions that are clearly exempt are those where real property is transferred “by deed, real estate contract, judgment, or other lawful instruments that transfer title to real property and are filed as a public record.” Interests in property held by a qualified small business for five years or more are likewise exempt. Yet where a real estate interest is sold or exchanged by a “privately held entity,” the exempt share of that interest is limited to “the fair market value of the real estate owned directly by the entity less its basis, at the time that the sale or exchange of the individual’s interest occurs.” Moreover, the law will allow the state Department of Revenue to determine fair market value, regardless of transaction price or any other agreed amount.
If you’re interested in a full update on local market trends, and how they may impact real estate investments, download Realogics Sotheby’s International Realty 2021 Exclusive Report below.

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