Watch Out — Washington is Coming for Your Money

That is if you sell your stocks, bonds, etc.

The 2021 Washington State Legislature passed?ESSB 5096?(RCW 82.87) which creates a 7% tax on the sale or exchange of long-term capital assets (stocks, bonds, business interests, or other investments, and many tangible assets) if the profits exceed $250,000 annually. This tax applies to individuals only, though individuals can be liable for the tax as a result of their ownership interest in an entity that sells or exchanges long-term capital assets. It is only applicable to gains allocated to Washington state. The tax takes effect on Jan. 1, 2022, and the first payments are due on or before April 18, 2023.

An entrepreneur should be asking themselves, “Does this affect my retirement and tax planning?” The answer: If you are even a candidate to ask that question living in Washington state, you should be talking to your professional advisors confirming what you should be doing to mitigate the potential (controversial) tax? If you were to ask?me?or any of the?firms?with which I am affiliated — and affected by the tax, the answer would be to look at all of your options. One viable option is in the IRS code section 453 as it may provide a nice answer to a large problem, the second, maybe a Nevada Incomplete Gift Non-Grantor Trust (also known as a NING Trust), and lastly, potentially look at a charitable gift trust. As any good advisor should say though, “It all depends on the facts and circumstances surrounding the issue.”

Mentioned above that the tax is controversial. Currently there are at least two lawsuits in Washington state relating to the tax. In some circles it is claimed the tax is against Washington state laws. As a result, even if the state loses the lawsuit it can be assumed the suit will be tied up in courts for many years. Even if adjudicated at a quick pace it looks like the two existing cases would not be ruled until this summer. That results in some tough planning for taxpayers and their advisors. Some proponents of the revenue collected from this tax like that the money will fund the education legacy trust account and common school construction account in Washington.

Either way, the good news is that there are some exemptions.

Exemptions

The sale or exchange of the following assets are exempt from the Washington capital gains tax:

• Real estate.
• Interests in a privately-held entity to the extent that the capital gain or loss from such sale or exchange is directly attributable to the real estate owned directly by such entity.
• Assets held in certain retirement accounts.
• Assets subject to condemnation, or sold or exchanged under imminent threat of condemnation.
• Certain livestock related to farming or ranching.
• Assets used in a trade or business to the extent those assets are depreciable under Title 26 U.S.C. Sec. 167(a)(1) of the internal revenue code or qualify for expensing under Title 26 U.S.C. Sec. 179 of the internal revenue code.
• Timber, timberlands, and dividends and distributions from real estate investment trusts derived from gains from the sale or exchange of timber or timberlands.
• Commercial fishing privileges.
• Goodwill received from the sale of a franchised auto dealership.

Deductions

The following deductions apply:

• A standard deduction of $250,000 per year per individual, married couple, or domestic partnership. This amount is adjusted for inflation annually.
• The long-term capital gain from an individual’s sale of all or substantially all of a qualified family-owned small business.
• Charitable donations in excess of $250,000 per year per taxpayer. The charitable donations deduction cannot exceed $100,000 per year per taxpayer. These amounts are adjusted for inflation annually.

Credits

The following tax credits are included:

• A business and occupation (B&O) tax credit is included for B&O taxes due on the same sale or exchange which is subject to the Washington capital gains tax.
• A Washington capital gains tax credit is included for the amount of any legally imposed income or excise tax paid by the taxpayer to another taxing jurisdiction on capital gains derived from capital assets within the other taxing jurisdiction to the extent such capital gains are included in the taxpayer’s Washington capital gains.

How to report and pay the tax

Only individuals owing capital gains tax are required to file a capital gains tax return, along with a copy of their federal tax return for the same taxable year. The capital gains tax return is due at the same time as the taxpayer’s federal income tax return is due. Taxpayers who receive a filing extension for their federal income tax return are entitled to the same filing extension for their capital gains tax return. However, a filing extension does not extend the due date for paying the capital gains tax due. If you need help with the taxes relating to this check here.

Further Questions and Answers…

Do I owe money when I sell real estate?

No. Washington’s capital gains tax does not apply to the sale or exchange of real estate. It does not matter:

• How long the seller owned the property.
• Whether the seller occupied the property.
• Where the property is located.
• What type of property it is (commercial or residential).
• Who owns the property (individual, trust, or business).

What does allocated to Washington mean?

Allocation is a way of assigning the long-term capital gain or loss generated by a transaction to a particular jurisdiction.

Allocating long-term capital gains and losses is important because, for example, an individual’s long-term capital gains that are allocated to a location other than Washington are not subject to the Washington capital gains tax.

Long-term capital gains are allocated to Washington as follows:

• For intangible personal property such as stock or bonds, gains are allocated to Washington if the?taxpayer?is domiciled in Washington at the time the sale or exchange occurred.
• For tangible personal property such as art or collectibles, gains are allocated to Washington if either of the following are true:
• The?property?was located in Washington at the time of sale.
• The?property?was not located in Washington at the time of sale but?all?of the following are true:
• The property was located in Washington in the same year or the year before the sale took place.
• The individual was a Washington resident at the time of the sale.
• The sale was not subject to an income or excise tax by another jurisdiction.

Does my business entity owe capital gains tax?

No. Washington’s capital gains tax only applies to individuals, generally. However, individual owners of entities that are pass-through or disregarded entities for federal tax purposes may owe Washington’s capital gains tax on gains from sales or exchanges made by such entities.

Again, if you are an entrepreneur and wondering if this tax affects you one thing is clear, go to your professional advisor. There could be thousands, hundreds of thousands, or even millions at stake.

R. Kenner French, is a small business contributor at Forbes.com, author of three books, an executive at both?VastSolutionsGroup.com?and?VastHoldingsGroup.com, a keynote speaker, and a?Dave Matthews Band?fan!