Washington currently imposes a real estate excise tax (“REET”) on the sale or transfer of real property in the state at a rate of 1.28% of the selling price. Local governments can also impose REET at the rate of 0.25% or 0.50%, for a combined rate of 1.53% or 1.78% depending on the city or county. Seattle, Bellevue, and most of the more densely populated areas in Washington impose a 0.5% local rate; this will not change.
REET taxes on larger transactions will be increased by recently enacted ESSB 5998. With the passage of ESSB 5998, a tiered REET rate structure will go into effect January 1, 2020. On January 1, 2020, the state rates for REET will be:
- 1.1% if the selling price is equal to or less than $500,000.
- 1.28% on the portion of the selling price that is greater than $500,000 but equal to or less than $1,500,000.
- 2.75% on the portion of the selling price that is greater than $1,500,000 but equal to or less than $3,000,000.
- 3% on the portion of the selling price that is greater than $3,000,000, and 1.28% of the selling price of property classified as timberland or agricultural land.
In addition to this tiered system and rate change, the Legislature suspected that taxpayers would be incentivized to try to plan around this new regime. To that end, the bill expands the power of the Department of Revenue to disregard the form of any transaction or series of transactions that the Department suspects may result in a lower tax rate applying. In making this determination, the Department has the broad discretion to consider:
- Whether an arrangement or transaction changes in a meaningful way, apart from its tax effects, the economic positions of the participants in the arrangement when considered as a whole.
- Whether substantial nontax reasons exist for entering into an arrangement or transaction.
- Whether an arrangement or transaction is a reasonable means of accomplishing a substantial nontax purpose.
- Other relevant factors.
Obviously, with this vague criteria, even the most innocent arrangement could be ensnared by the Department. All but the most straight-forward, single transactions will need to be carefully assessed to assure proper tax treatment.
Coupled with this increased discretion for the Department, ESSB 5998 also makes changes to the definition of a “sale” to include the transfer or acquisition within a 36-month period of a controlling interest in any entity that owns real property. Under current law, the transfer or acquisition of a controlling interest had to occur within a 12-month period for the tax to apply. With this change, a series of transactions over a 3-year period, such as in a transition plan, can now trigger the tax if the total transfer or acquisition is 50% or more of the ownership of the entity holding real property.
Finally, the bill also requires any entity filing reports with the Washington Secretary of State to disclose whether the entity owns real property and whether there has been a transfer of at least 33% of a controlling interest in the entity. For all other purposes, a “controlling interest” remains defined as 50% or more of the stock, capital, profits, or beneficial interest in the entity.
Combined with the new 3-year period for determining whether there has been a transfer of a controlling interest, this change in reporting requirements can be a trap for the unwary. If a company fails to report a change in control of more than 33% but less than 50% in a given year, the company will be subject to late payment and evasion penalties if there ultimately does occur a 50% change in controlling interest within a 3-year period. This appears to be so even if the ultimate change in controlling interest is reported in a subsequent year. Any company with significant real property holdings in Washington will need to be vigilant in their compliance.