This article discusses changes to Washington state’s real estate excise tax which took effect on January 1, 2020.
Introduction
Prior Law (Prior to January 1, 2020)
Washington charges excise tax on taxable real estate sales and transfers. Prior to January 1, 2020, the excise tax rate was a uniform rate equal to 1.28% of the true and fair value of the property. In addition to the state rate of 1.28%, additional excise tax is added by cities and counties. Both sales of real property as well as certain transfers of real property, including the transfer of a “controlling interest” in limited liability companies and corporations, trigger real estate excise tax. Read more about these important changes to real estate tax in Washington.
New Law (Beginning January 1, 2020)
Beginning January 1, 2020, the excise tax rate is changed to a graduate rate structure. The new rates are as follows:
- 1.1% of the selling price of the property up to $500,000
- 1.28% of the selling price above $500,000 and up to $1,500,000
- 2.75% of the selling price above $1,500,000 and up to $3,000,000
- 3.0% of the selling price above $3,000,000
Because cities and counties in Washington can impose an additional level of excise tax, the actual excise tax rate will be higher than shown above.
Changes to Controlling Interest Transfers
The Washington legislature also made an important change to the “controlling interest” rule with significant consequences.
What is the Controlling Interest Rule?
Under the prior law, Washington’s excise tax was triggered upon the transfer of a “controlling interest” in a corporation, partnership, limited liability company (LLC) or a trust. This triggering event has caught many a shareholder, partner or LLC member unaware, as the excise tax applies to the true and fair value of all of the property owned by the entity or trust. The theory behind the controlling interest rule is that the transfer of a controlling interest is similar to the transfer of the real property owned by the entity, since buyer of a controlling interest typically has complete control over the real property.
Whether a transfer of controlling interest occurs depends upon whether the transfer is in a corporation or a partnership, LLC or trust:
- For corporations, a transfer of controlling interest occurs when 50% or more of the combined voting power of all stock classes is transferred
- For LLCs, partnerships and trusts, a transfer of controlling interest occurs when there is a transfer of 50% or more of the capital, profits or beneficial interest in the LLC, partnership or trust
- Changes to Controlling Interest Events
Under the old law, if the transfer of a controlling interest occurred in any 12 month period, then excise tax on the true and fair value of all of the real property would be due and payable immediately upon the effective date of transfer of the controlling interest.
New Changes to the Transfer of Controlling Interest Rule
Beginning January 1, 2020, the lookback period for determining if a transfer of controlling interest has been extended, from 12 months to 36 months.
In addition to the extension of the lookback period, the new law imposes additional requirements for determining when a controlling interest transfer has occurred.
Single Seller and Single Buyer
- If a single seller sells partial interests in the entity that add up to 50% (over 36 months), then excise tax is due
- If a single buyer purchases partial interests that add up to 50% (over 36 months), then excise tax is due
Sale by Multiple Owners
- If multiple owners of the entity or trust sell their interests to different buyers, so long as the buyers are not “acting in concert,” then the controlling interest transfer is not triggered
- If multiple buyers are acting in concert when they purchase partial interests then the controlling interest rule will apply if the purchases equal 50% or more of the interests in the entity or trust
Summary
Careful review of the new excise tax rates and changes to the controlling interest transfer rule is recommended in order to avoid any unpleasant surprises with regard to the sale of real property in Washington state or the sale or redemption of ownership interests in entities and trusts that own real property in Washington state.
Contact Brett Sullivan to discuss any questions you may have regarding changes to real estate excise tax in Washington.