On May 4, 2021, Governor Jay Inslee signed into law Senate Bill (SB) 5096, a bill creating a new Washington state excise tax on the sale or exchange of certain capital assets.
Beginning January 1, 2022, SB 5096 imposes a new tax at a rate of 7% of an individual’s “Washington capital gains.” The term “Washington capital gains” means an individual’s net long-term capital gain reportable for federal income tax purposes, subject to certain adjustments and less the individual’s applicable deductions. To the extent an individual’s federal net long-term capital gain includes a loss carryforward directly attributable to losses from sales or exchanges allocated to Washington, the loss carryforward is taken into account in the calculation of the individual’s Washington capital gains. An individual may not include any losses carried back from a future year for federal income tax purposes.
Deductions: In computing Washington capital gains, an individual is allowed a $250,000 deduction. An individual and the individual’s spouse or domestic partner are allowed a combined deduction of $250,000 regardless of filing status. The law also allows an individual a deduction for amounts in excess of $250,000 donated by the individual to one or more qualified organizations during the same taxable year, up to a $100,000 maximum for the taxable year. Additionally, an individual may deduct from Washington capital gains certain adjusted capital gains derived from the sale of substantially all of the assets of, or the transfer of substantially all of the interest in, a “qualified family-owned small business” in a taxable year.
Allocations: Under the new law, long-term capital gains and losses from the sale or exchange of tangible personal property are allocated to Washington if the property was located in Washington at the time of the sale. If the property was not located in Washington at the time of the sale or exchange, gains and losses are allocated to Washington if:
- the property was located in Washington at any time during the taxable year in which the sale or exchange occurred or the immediately preceding taxable year;
- the taxpayer was a resident of Washington at the time the sale or exchange occurred; and
- the taxpayer is not subject to the payment of an income or excise tax on the long-term capital gains or losses by another taxing jurisdiction.
Long-term capital gains or losses derived from intangible personal property are allocated to Washington if the individual was domiciled in Washington at the time the sale or exchange occurred.
Pass-through ownership: The tax is not imposed at the entity level. For purposes of this new tax, an individual is considered to be the beneficial owner of long-term capital assets held by an entity that is classified as a disregarded entity or pass-through entity for federal tax purposes, such as a partnership, S corporation, or grantor trust, to the extent of the individual’s ownership interest in the entity for federal income tax purposes.
Definitions: The term “capital asset” has the same meaning as provided by section 1221 of the Internal Revenue Code (the “Code”), and also includes any other property if the sale or exchange of the property results in gain that is treated as a long-term capital gain under section 1231 of the Code or any other provision of the Code. A gain or loss is a long-term capital gain or loss if the gain or loss results from the sale or exchange of a capital asset held for more than one year.
Real estate exemption: The tax is not imposed on the sale or exchange of:
- 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 real property is located;
- An interest in a privately held entity to the extent of any long-term capital gain or loss directly attributable to real estate owned by the entity. This exemption is equal to the fair market value of the real estate owned directly by the entity less the entity’s adjusted tax basis in the real estate at the time the sale or exchange occurs, and is adjusted to reflect the percentage of the individual’s ownership interest in the entity.
Exemption for certain property used in a trade or business: The tax is not imposed on the sale or exchange of property depreciable under section 167(a)(1) of the Code or property that qualifies for expensing under section 179 of the Code.
Additional exemptions: The tax is not imposed on the sale or exchange of:
- Assets held in certain retirement savings accounts, tax-sheltered annuities, deferred compensation plans, and similar retirement savings vehicles;
- Assets under threat of government condemnation;
- Certain livestock;
- Timber, timberland, or dividends and distributions from certain real estate investment trusts derived from the sale or exchange of timber;
- Commercial fishing privileges; and
- Goodwill received from the sale of certain auto dealerships.