If you’re considering a move to Washington State, go for the views of Mount Rainier or the Olympics—but think twice if you’re relocating to avoid taxes on capital gains.
That’s because a new excise tax on certain long-term capital gains has recently been signed into law in the Evergreen State.
Effective January 1, 2022, the law has notable exceptions—and no shortage of opponents.
About the New Tax
Washington State’s new law imposes a 7% tax on net long-term capital gains from the voluntary sale or exchange of stocks, bonds, and other capital assets in excess of $250,000.
A long-term capital gain refers to the sale or exchange of a capital asset held more than one year.
Unlike federal long-term capital gains, long-term capital losses or carry forward capital losses may not be used to offset long-term capital gains under Washington State’s new law.
Deductions of up to $100,000 are allowed for qualified charitable donations.
Ordinary income, short-term capital gains, dividends, and interest are all excluded from the tax.
Tax proceeds, earmarked for early education, are expected to top $415 million annually.
Who Is Subject to the Tax?
The new tax applies to individuals with long-term capital gains allocated to Washington by law.
- Gains from the sale of tangible personal property are generally allocated to Washington if the property was located in Washington at time of sale.
- Gains from the sale of tangible property located outside Washington may be subject to the tax if the seller is a resident of Washington at the time of sale.
The tax does not apply to legal entities such as corporations, but individuals with an ownership interest in passthrough entities may be subject to the tax on related gains.
It is anticipated fewer than 0.1% of state residents will be expected to have to pay the tax in any given year.
Under the new excise tax law capital gains do not include gains from the following:
- Sale of real estate (land/structures)
- Assets held in retirement accounts
- Livestock sales
- Business property subject to depreciation
- Timber sales
- Goodwill received from the sale of franchised auto dealerships
Small Business Exception
If the sale or portion thereof relates to the sale of an interest in a qualified family-owned small business, taxpayers may deduct the amount of long-term capital gain relating to the sale.
A qualified family-owned small business is defined as:
- A business with less than $10 million in sales in the year preceding the sale AND
- A business in which the taxpayer materially participated in for at least five of the past 10 years preceding the sale AND
- A business in which the taxpayer had an ownership interest for at least five years before the sale.
Ongoing Judicial Challenge
While the tax is called an excise tax, it is being contested as an income tax, which are prohibited by the constitution of Washington State.
Seven opponents have filed a lawsuit in the Superior Court of Washington for Douglas County, challenging the new tax as a violation of the state constitution.
How this plays out remains to be seen, but for now, taxes will be due on capital gains realized beginning in 2022.
For more information, visit the Washington State Department of Revenue webpage.
You can also reach out to your Vista team with additional questions, or contact your accountant regarding nuances of the new law that might apply to your tax situation.