Effective January 1, 2022, Washington imposes an excise tax on an individual’s long-term capital gains from the sale of stock, bonds, and other assets exceeding $250,000 if the assets were located in Washington at the time of sale or the taxpayer was a resident of Washington at the time of the sale.
In an order issued November 30, 2022, the Washington Supreme Court (Court) granted a stay of a lower court’s ruling that the excise tax violated the Washington State Constitution. The Court’s order will allow the Washington Department of Revenue to enforce the excise tax and require taxpayers to file returns for 2022 by the statutory deadline of April 18, 2023, regardless of whether the Court has issued a final ruling on the constitutionality of the tax by that time.
Applicability to trusts. The excise tax is imposed on individuals and not on entities. If a trust is a grantor trust for federal tax purposes, or if the trust is a nongrantor trust for federal tax purposes and the grantor’s transfer of assets to the trust is treated as an incomplete gift, the individual grantor of the trust is considered the beneficial owner of the trust assets and is potentially subject to the excise tax on the sale of a capital asset held by the trust.
Allocation. Long-term capital gain from the sale of a capital asset is subject to the tax if the gain is allocated to the State of Washington.
- If the capital gain is derived from the sale of an asset that is tangible property, the capital gain is allocated to Washington if the property was located in Washington at the time of the sale.
- If the tangible property is not located in Washington at the time of the sale, capital gain generally is allocated to Washington if all of the following are true: (i) the tangible property was located in Washington at any time during the taxable year in which the sale occurred or the immediately preceding taxable year; (ii) the taxpayer was a “resident” at the time the sale occurred; and (iii) the sale was not subject to an income or excise tax by another jurisdiction.
- If the gain or loss is derived from the sale of intangible personal property, the capital gain is allocated to Washington if the taxpayer is a resident of Washington at the time the sale of the intangible property occurred.
Changing residency or domicile. An individual is generally considered a resident of Washington for purposes of the excise tax if the individual is “domiciled” in Washington or is physically present in Washington for more than 183 days during the taxable year. While the excise tax statues do not define the term “domicile,” the term is generally defined to mean the place an individual considers to be the individual’s true, fixed, and permanent home for an indefinite time and to which the person has the intention of returning after an absence.
In determining whether a taxpayer has changed residency or domicile, a state taxing authority may consider several factors, including the time a taxpayer is physically present in the new state and whether the taxpayer has purchased a home in the new state, among other factors. An individual taxpayer who is considering whether to change his or her Washington domicile and establish residency in another state must understand what factors may be relevant based on the facts specific to the taxpayer’s circumstance.
Please contact any of the authors of this alert if you have questions about changing residency or domicile for state tax purposes.