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Legislative Report – Taxes

In an effort to balance the budget, the Washington State Legislature submitted multiple bills related to tax increases and changes that would affect real estate.

Capital Gains – A capital gain is realized when a capital asset, such as real estate, is sold or exchanged at a price higher than its basis. Basis is an asset’s purchase price, plus commissions and the cost of improvements less depreciation. We have a federal capital gains tax. This year, Washington introduced several bills for a state capital gains tax. That tax proposal was defeated. One reason for the defeat was the threat of lawsuits because capital gains are considered income and this tax would in essence be an income tax, which is prohibited by the Washington State Constitution.

Real Estate Excise Tax – The Legislature has passed a “reformed & progressive” graduated Real Estate Excise Tax (REET) that impacts commercial real estate and wealthy home sellers, particularly owners in the Puget Sound region. This is the transfer tax on real estate transactions. For 90 to 95 percent of all transactions in the state, the state portion of the REET will either go down or remain unchanged. For the other 5 to 10 percent, it will go up substantially. The reformed tax matrix, which will take effect on January 1, 2020, is as follows on real estate sales:

• Sales under $500,000: 1.1% tax rate (down from 1.28%)
• Sales from $500,000 to $1,500,000: 1.28% tax rate (unchanged and marginal rate on first $500k)
• Sales from $1,500,000 to $3,000,000: 2.75% tax rate (115% increase, but marginal rate increase means first $500k @ 1.1%, then $500k to $1.5M @ 1.28%)
• Sales over $3,000,000: 3.0% tax rate (134% increase, marginal rates in effect)

These rates are in addition to the local excise taxes (.5% in most of Thurston County). As an example, under the old rates the excise tax on a $3,500,000 sale is $62,300. Under the new law, the total excise tax on that same sale will be $92,050.

Submitted by Carolyn Graden, CCIM

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