Washington Implements Graduated Real Estate Excise Tax at the State Level

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The Washington State Legislature recently passed ESSB 5998, overhauling the state’s real estate excise tax framework and putting into place a graduated system replacing the prior flat rate applicable to all property sales. Governor Inslee is expected to sign the legislation into law, which replaces the statewide flat rate of 1.28% on all sales of real estate with a graduated rate ranging from 1.1% up to 3.0%, depending on the sale price of the property.

Generally speaking, real estate excise tax (“REET”) applies to all sales of real property in the state. The tax, typically paid by the seller, applies to the base selling price of the real estate, irrespective of any mortgages, debts, or liens that may affect the property. Prior to the passage of this legislation, Washington imposed a flat 1.28% tax on all sales of property in the state. In addition, local governments at the city and county levels have the ability to impose an additional REET ranging from 0% up to a possible 2.25% allocated for specific improvements and purposes.

The new REET system at the state level – if signed by Governor Inslee – will go into effect beginning January 1, 2020, and will create a graduated range of rates for property sales as follows:

  • Selling price of $500,000.00 or less – 1.1%
  • Selling price of more than $500,000.00 up to $1,500,000.00 – 1.28%
  • Selling price of more than $1,500,000.00 up to $3,000,000.00 – 2.75%
  • Selling price of more than $3,000,000.00 – 3.0%

The primary changes under the new system will be a slightly lower tax rate for real estate sales of $500,000 or less, and a fairly significant increase to all sales over $1,500,000, especially those exceeding $3,000,000. With respect to undeveloped land, timberland, agricultural land, and water/mineral rights, a flat rate of 1.28% will be imposed regardless of sale price. Further, beginning in 2022, and every fourth year thereafter, the sale price thresholds will be adjusted based either on the CPI or by 5%, whichever is less.

The new REET system will also apply to controlling interest transfers deemed sales, specifically any transfer or acquisition of a controlling interest in any entity with an interest in real property within a 36 month period. The DOR has the authority to disregard sales it determines were structured to avoid tax liability, and impose the tax rate it determines proper, including treating multiple sales as a single sale.

How the new graduated (and increased) real estate excise tax system will affect the residential and commercial markets in Washington and Seattle in particular remains to be seen. Please contact one of Helsell Fetterman’s Land Use and Real Estate attorneys with any questions or if you would like to learn more.

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