Back in 2021, Washington State passed a 7% capital gains tax intending to generate revenue for the state that can be used to fund education and other essential public services. Effective for transactions occurring on or after January 1, 2022, the tax aims to raise about $500 million annually. On March 24th, after a lengthy legal challenge, the Washington State Supreme Court ruled that the tax is lawful. Here are a few of the key details on this new state capital gains tax:
- The tax applies to individuals with realized capital gains over $250,000 (single) per individual. In the case of spouses or domestic partners, the combined standard deduction is limited to $250,000 whether they file joint or separate returns
- Key exemptions include real estate sales and family-owned businesses with under $10M revenue (more details below on these key exemptions)
- Returns are required to be filed electronically through the state’s MyDOR portal, and any tax due must be paid by EFT or with credit card.
Applying to both residents and non-residents who sell property located within the state, there are several important exemptions. The sale of a primary residence, assets held in retirement accounts, and family-owned businesses with under $10 million in annual revenue and no more than 50 employees are explicitly exempted. However, Qualified-family owned small businesses (QFOSBs) must meet specific ownership criteria to be eligible for the exemption. Real estate sales, which are not subject to the tax whether held individually or passed through from an entity, provided the gains are directly attributable to the real estate. However, guidance on the “directly attributable” requirement is still pending.
As a Washington state resident or a non-resident with taxable assets in the state, you may be impacted by the capital gains tax, especially if you realize significant gains from the sale of assets. High net worth individuals and owners of larger businesses are more likely to be affected.
If you’re concerned about the new Washington state capital gains tax, contact your advisor or your tax professional to see if this applies to your situation. We’re always here to help.
Read More:
Washington State Department of Revenue, “Capital Gains Tax.” https://dor.wa.gov/taxes-rates/other-taxes/capital-gains-tax
Seattle Times, “WA Supreme Court Upholds Capital Gains Tax.” https://www.seattletimes.com/seattle-news/politics/wa-supreme-court-upholds-capital-gains-tax/
