Proposed Capital Gains Tax - Updates for Property Owners

Posted By: Chester Baldwin 2021 Legislative Session ,

Members and Friends - 

As many of you are aware, we are in the midst of a battle to remove Real Estate from 5096 - the proposed Washington Capital Gains tax. 

As passed by the Senate, SB 5096 would impose a state Capital Gains tax on real estate when a less than controlling interest in the real estate or an entity owning the real estate is transferred.  If the minority interest holder must pay the capital gains tax on a minority transfer, the state is not only getting 100% of the real estate excise tax (REET) each time a controlling interest is transferred, but in addition is also getting the capital gains tax from the minority interest holder who sold his/her/their non-controlling interest.  Ironically, the controlling interest owner(s) who pay the REET will never face the capital gains tax, only the non-controlling interest owner who sells that minority interest. 

Real estate is unlike stocks or other capital assets that would be subject to Capital Gains tax.  Real estate is a community investment that provides local services and generates local and state property taxes annually, and bears the local and state real estate excise tax when sold.  Further, the types of real estate that are owned and developed owned through entities that have less than controlling interests (and would therefore be subject to Capital Gains under the Senate – passed version) are the same types of real estate that are subject to the higher REET rates enacted two years ago. 

Legislators have now proposed the following language exempting real estate:

"Real estate" means land and fixtures affixed to land. The term also includes used mobile homes, used park model trailers, used floating homes, and improvements constructed upon leased land.

This is essentially the REET definition with the beneficial interest language deleted.

Alternatively, they have also proposed:

"Real estate" means land and all buildings, structures or improvements or other fixtures of whatsoever kind thereon, except improvements upon lands the fee of which is still vested in the United States, or in the state of Washington, and all rights and privileges thereto belonging or in any wise appertaining, except leases of real property and leasehold interests therein for a term less than the life of the holder; and all substances in and under the same; all standing timber growing thereon, except standing timber owned separately from the ownership of the land upon which the same may stand or be growing; and all property which the law defines or the courts may interpret, declare and hold to be real property under the letter, spirit, intent and meaning of the law for the purposes of taxation. The term real property shall also include a mobile home which has substantially lost its identity as a mobile unit by virtue of its being permanently fixed in location upon land owned or leased by the owner of the mobile home and placed on a permanent foundation (posts or blocks) with fixed pipe connections with sewer, water, or other utilities.

This is the real property tax definition in RCW 84.04.090, without some references to mobile homes under lease.

Finally, they have added a new section:

NEW SECTION. Sec. 104. This chapter does not apply to the sale or exchange of:

(1) All real estate transferred by deed, real estate contract, judgment, or other lawful instruments that transfer title to real property and are filed as a public record with the counties where the real property is located;  [The last means of transfer intends to apply to reconveyances under deeds of trust, forfeitures, and other miscellaneous ways that title moves from one to another.]

(2) An interest in an entity only to the extent that any long-term capital gain or loss from such sale or exchange is directly attributable to the entity's interest in real property.  This subsection shall not apply to a publicly traded entity that does not hold itself out as primarily engaged in holding real property.  The department is not bound by the parties' agreement as to the allocation of consideration or fair market value; provided however, valuation in the method set forth in subsection (2)(i) shall be binding as to value.

            (i) In the event that the entity holds assets in addition to real estate, then the true and fair value of the real property shall be determined for purposes of this exemption by (a) a fair market appraisal of the real property or (b) an allocation of assets by the seller and buyer made under section 1060 of the Internal Revenue Code of 1986, as amended.  [This language comes from the DOR’s REET rule, WAC 458-61A-102(a).]

            (ii) If the true and fair value of the real estate at the time of sale cannot reasonable be determined by either method in subsection (3)(i) of this section, then the market value assessment for the property maintained in the county property tax rolls at the time of sale shall be used as the value for purposes of this exemption.  [This language also comes DOR’s REET rule, WAC 458-61A-102(b).]