Client Alert: New Real Estate Excise Tax Rules to Take Effect January 1, 2020
06/07/2019 posted by CH&
On May 21, 2019, Governor Inslee signed the recently passed Washington State Senate Bill 5998 (“SB 5998”), which will impose new rates and rules for real estate excise taxes (“REET”) in Washington State beginning January 1, 2020.
SB 5998 makes important changes to the definition of a “sale” for REET purposes. Washington State REET provisions treat a transfer of a “controlling interest” in an entity that owns real estate in Washington as a transfer that is subject to payment of REET. “Controlling Interest” means transfer of 50% or more of the interests in an entity. Under current law, the State considered all transfers within a twelve month period toward the 50% transfer threshold. Under SB 5998, the State will consider all aggregate transfers within a thirty six (36) month period as a sale triggering REET. This could be an important change for families who were using annual transfers of interests to shift ownership. It’s also something that companies that own real estate in Washington should keep in mind.
Relatedly, SB 5998 also requires any entity that is required to file an annual report with the Washington Secretary of State to disclose any transfer of an interest greater than or equal to 1/6th of the interests in the entity. In the event an entity fails to report such a transfer to the Washington Secretary of State and it is later determined that REET is due, the entity will be subject to a 50% penalty on the amount due. As we approach the second half of 2019, we encourage entities that frequently have transfers of interests to begin implementing a process that will allow such entities to track transfers effectively, as well as evaluate any impact these new rules may have on planned future transfers.
In addition to the changes to the controlling interest transfer rules, the piece of the legislation that has garnered the most attention is the replacement of the current flat REET of 1.28% with a graduated scale. The following rates will be imposed beginning January 1, 2020*:
- 1.1% on the portion of the selling price less than or equal to $500,000
- 1.28% on the portion of the selling price greater than $500,000 and equal to or less than $1.5 million
- 2.75% on the portion of the selling price greater than $1.5 million and equal to or less than $3 million
- 3.0% on the portion of the selling price greater than $3 million
- Beginning July 1, 2022, and every fourth year thereafter, the above thresholds may be adjusted to reflect the lesser of the growth of the consumer price index for shelter or 5%.
The rates above reflect only the State portion of the REET. Local REET rates also apply, most commonly increasing the rates above by an additional 0.5%.
The Bill does not affect rates for classified agricultural land or timberland, which will remain subject to REET at 1.28%.