Capital Gains Tax Will Crush Housing Creation, Property Owners

Posted By: Chester Baldwin 2021 Legislative Session ,

Washington is facing a severe housing crisis with a shortfall of over 300,000 homes, and we need to create at least 10,000 new apartments each year just to keep up with demand.

The driving reasons behind the shortage include onerous regulations on housing development, exclusionary zoning policies that prevent density, and ever-increasing property, real estate, and sales taxes that drive up the cost to build and operate housing.

Now, a proposed bill would drive up costs further and have a chilling effect on housing creation. SB 5096 would implement a 9% Capital Gains tax on all residential dwellings with four or more units. This includes commercial office buildings, manufactured housing, condominiums, self-storage, retail, and floating homes. This new tax would be added on top of other increased taxes already going into effect.

The graduated Real Estate Excise Tax (REET) that went into effect in the beginning of 2020 increased taxes on all commercial properties worth more than $1.1 million. For larger affordable housing projects, the tax increase exceeded 90%.  In addition, real estate also pays property tax on a yearly basis contributing to state and community needs.

In 2019, a $10 million building paid $178,000 in REET. In 2020, the REET increased to $319,000 and became the highest in the nation. A 9% capital gains would add an additional $218,000 on top of the REET. That means, the total tax burden would balloon to $538,000. Property owners, developers, and housing providers would be severely impacted and the downstream effects could be disastrous.

All costs must be factored in to the financial analysis for building new housing. More than tripling the transaction taxes since 2019 will dramatically increase the costs to build new multifamily housing, leading to a decrease in supply in the short term, and even higher rents in the long term as these additional costs are absorbed.

Governor Inslee has stressed the importance of creating more affordable housing as have many leaders of the Washington Legislature. A 9% Capital Gains tax will do the exact opposite. WBPA urges policymakers to focus on housing creation and affordability, not new taxes that will increase the cost to create, build, and maintain housing.