Joe Violette, CPA and Supervisor
As many people have heard, there is a new Washington state capital gains tax going into effect on January 1, 2022. The law is still being challenged by some in court, but right now it looks very likely that the law will be implemented for tax year 2022 in Washington. For most people, this new law won’t have much impact, but it is important to understand the aspects of the new law and the potential impacts.
The law is being designed primarily with the intent of taxing long-term capital gains on the sale of publicly traded securities, currently an estimated 98% of the revenue generated by the new tax will be on these transactions. Many other types of transactions, such as all sales of real estate or any short-term capital gains or dividends are not taxed under this new law. Other common transactions that are excluded include: all retirement account activity, depreciable assets used in a business, and gain/loss from livestock sale if a majority of your income is farming income.
The long-term capital gains will be taxed at a 7% rate. However, most taxpayers will have all their long-term capital gains excluded from this calculation. There is a $250,000 standard deduction each year for this tax, so you only pay the 7% tax on your long-term capital gains that are over $250,000 in any given year. You will only be required to file a tax return for this new tax if you owe money, so with this large exemption most WA residents will not be required to file this new return. It’s important to note that as it is currently written, the $250,000 deduction is the same for single or married filers in 2022. The new tax will be assessed only on individuals, and not on businesses. C-corps and non-grantor trusts aren’t subject to the tax at all. Pass-through and disregarded entities don’t pay the tax however, they pass through the gains to the individual owners who will pay the tax on their gains.
Business depreciable assets are excluded from this tax, however sales of partnership interest or shares of stock in an entity are subject to the new tax. There are two exemptions to this rule: first for sale of interest in an entity that directly owns real estate, and secondly for a qualified family-owned small business. A qualified family-owned small business is one that has 5+ years of holding an interest and materially participating, the family owns at least 50% of the company, and the business has revenue of under $10 million per year. The rules, especially around entity sales that own real estate, can be a little complicated and depend on your unique circumstances. If you are considering selling your business in 2022 or beyond, it is highly recommended that you consult with a tax advisor to make sure you are properly accounting for the impact of this new tax.
Real estate is excluded from this new WA capital gains tax. However, that doesn’t mean you will escape taxation from the state of Washington on the sale of real estate. The Real Estate Excise Tax (or REET for short) is subject for real property transactions in WA. The rate is 1.1% of the sales price (not gain), for transactions under $500,000 and gradually increases up to 3% for the portion of any real property sales above $3,000,000.
If you do have some large capital gains that might be subject to this tax, there are some potential unique planning opportunities you might want to consider:
*Consider selling appreciated long-term capital gain stocks in 2021. Selling the stocks in 2021 will exclude you from all WA capital gains tax (but you would still owe federal tax on the sale). Since it is sold at a gain, there is no wash sale rule, so you could buy the stock back as well if you wanted to continue holding it.
*Consider waiting until 2022 to do loss harvesting that you might normally do at the end of 2021. The losses you take would have a larger impact in 2022 than 2021 if you would be subject to the WA capital gains tax.
CNC Financial Group, LLC is here to help. You, along with our Financial Advisors, will consult with a Cordell, Neher & Company, PLLC tax professional to create a plan that is custom fit to you. Contact our team today at (509) 663-1661 with questions or to schedule a consultation.