The Washington Legislature passed a new state capital gains tax on April 5, 2021. Governor Inslee signed the bill, Senate Bill 5096, into law on May 4, 2021.
The new law imposes a 7% tax on gains exceeding $250,000 in a single year from the sale or exchange of certain long-term capital assets. The law takes effect January 1, 2022.
The new capital gains tax applies to certain capital assets held for more than one year. Capital assets subject to the new gains tax include: stocks and bonds; some tangible personal property (depending on the domicile of the taxpayer and location of the property at the time of the sale or exchange); intangible personal property owned by a taxpayer who is domiciled in Washington at the time of the sale or exchange; and other non-exempt capital assets.
Property exempt from the new capital gains tax include:
- Real estate, including used mobile homes, used park model trailers, used floating homes, and improvements constructed on leased land;
- Assets held in retirement accounts;
- Some interests in privately held entities;
- Some assets owned by and interests in qualified family-owned business; and
- Various other assets, including some timber/timberland, depreciable trade or business property some livestock, goodwill for car dealership franchises, condemnations, some agricultural property, and commercial fishing privileges.
Under the new law, an individual’s first $250,000 of capital gains is exempt from the new tax. The combined threshold for married couples and domestic couples is also $250,000. The $250,000 threshold is subject to annual adjustments for inflation.
Additionally, a deduction of up to $100,000 is available for taxpayers who contribute at least $250,000 to a Washington charity during the same tax year as the taxable transfer. The $100,000 deduction and $250,000 charitable minimum will both be adjusted for inflation.
A credit will be allowed for the amount of B&O tax owed on the same sale or exchange that triggered the capital gains tax. Any income or excise tax already paid to another jurisdiction on the same sale or exchange will also be allowed as a credit.
Taxpayers owing capital gains tax imposed under this new law will be required to file a tax return with the Washington Department of Revenue. Failing to file the required return will result in a penalty of 5% of the tax due for each month that the return goes unfiled, with the total penalty not exceeding 25% of the excise tax due.
Two lawsuits challenging the constitutionality of the capital gains tax have already been filed.
Each person’s specific circumstances will determine whether the new capital gains tax may impact their estate plan. If you have any questions about how the new Washington capital gains tax may impact your estate planning, please contact an attorney in our estate planning practice group, including Ryan Montgomery or Allison Int-Hout.