Deep Dive into the Washington 2020 Excise Tax Changes and Why

Monday, December 30, 2019   /   by Laura Lynn

Deep Dive into the Washington 2020 Excise Tax Changes and Why

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The January 1, 2020 excise tax change will have a significant impact on real estate sales for $1.5M+ The former model of 1.78% is over. The breakdown use to be: 1.28% (state) + .5% (city & county) of the sales price for all sales. The new calculation is still a percentage of the overall sales price, however now it is tiered, depending on sales price. 

This is the new 2020 Calculation: (add the .5% city/county tax to all of the below)

  • 1.1% on the portion of the selling price that is $500,000 and less;
  • 1.28% on the portion of the selling price that is greater than $500,000 and less than or equal to $1.5 million;
  • 2.75% on the portion of the selling price that is greater than $1.5 million and less than or equal to $3 million; and
  • 3.0% on the portion of the selling price that is greater than $3 million.


Overview

The State of Washington levies a real estate excise tax (REET) upon most sales of real property. The tax is calculated based on the full selling price, including the amount of any liens, mortgages, and other debts given to secure the purchase. The tax is due at the time of sale and is collected by the county when the documents of sale are presented for recording (WAC 458-61A-301).

In addition to the state real estate excise tax, cities and counties may impose local real estate excise taxes. The two main REET options for cities and counties are:

  • REET 1, or the “first quarter percent” – a 0.25% REET which may be imposed by any city, town, or county primarily for capital projects and limited maintenance;
  • REET 2, or the “second quarter percent” – an additional 0.25% REET which may be imposed by any city, town, or county fully planning under the Growth Management Act, to be used primarily for capital projects and limited maintenance;

There are also several other, more limited REET options available to certain cities and counties as discussed below.

Real estate excise taxes are typically the responsibility of the seller of the property, not the buyer, although the buyer is liable if the tax is not paid. However, sometimes the buyer pays some or all of the tax as part of the negotiated sale agreement, and there are a few other exceptions described below.


State Portion of Real Estate Excise Tax

The State of Washington levies a flat 1.28% real estate excise tax (REET) upon sales of real estate (chapter 82.45 RCW). While most of this revenue goes to the state general fund, a portion is deposited into certain accounts that are distributed to local governments, including the public works assistance account (RCW 43.155.050) used for loans and grants for public works projects and the city-county assistance account (RCW 43.08.290) for distribution to qualifying cities and counties.

Effective January 1, 2020, the state will switch to a graduated REET tax scale based on the selling price of the property (RCW 82.45.060):

  • 1.1% on the portion of the selling price that is $500,000 and less;
  • 1.28% on the portion of the selling price that is greater than $500,000 and less than or equal to $1.5 million;
  • 2.75% on the portion of the selling price that is greater than $1.5 million and less than or equal to $3 million; and
  • 3.0% on the portion of the selling price that is greater than $3 million.

These sale price thresholds will be adjusted by the state Department of Revenue effective January 1, 2023 and every four years thereafter. The lowest threshold ($500,000) will be adjusted based on the growth of the Consumer Price Index for All Urban Consumers (CPI-U) for shelter or 5%, whichever is less, and rounded to the nearest $1,000. If the CPI growth is negative, the threshold will remain unchanged. The remaining sale price thresholds will be increased by the same dollar amount as the lowest threshold.

However, the sale of real property classified as timberland or agricultural land is not subject to the graduated tax scale and will remain taxed at a flat 1.28% rate regardless of the sale price.


REET 1 – The First Quarter Percent

Any city, town, or county may impose a 0.25% real estate excise tax – known as REET 1 or the “first quarter percent” (RCW 82.46.010). If a county imposes this tax, it is applied within the unincorporated areas only. This tax may be imposed by the legislative body and does not require voter approval. Almost all cities, towns, and counties in the state have imposed REET 1, with the exception of a few very small jurisdictions.

REET 1 revenues are restricted and may only be used for certain purposes. However, the exact purposes depend on the jurisdiction’s population and whether or not it is fully planning under the Growth Management Act (GMA).

Population > 5,000 and Fully Planning Under GMA

Cities and counties that are fully planning under GMA and have a population of more than 5,000 must spend their REET 1 revenues on “capital projects” that are listed in the capital facilities plan (CFP) element of their comprehensive plan. RCW 82.46.010(6)(b) defines “capital projects” as:

[T]hose public works projects of a local government for planning, acquisition, construction, reconstruction, repair, replacement, rehabilitation, or improvement of streets; roads; highways; sidewalks; street and road lighting systems; traffic signals; bridges; domestic water systems; storm and sanitary sewer systems; parks; recreational facilities; law enforcement facilities; fire protection facilities; trails; libraries; administrative facilities, judicial facilities, river flood control projects […] and technology infrastructure that is integral to the capital project.

Sub-section (2)(b) also states that REET 1 funds may be spent on housing relocation assistance as defined within RCW 59.18.440 and 59.18.450, which in summary provide assistance to low-income tenants under specific circumstances defined by statute and local ordinance.

In addition, a portion of the REET 1 proceeds may be used for the maintenance of capital facilities as described below, with additional reporting requirements.

Note that REET 1 funds may not be used for developing or updating a capital facilities plan (CFP) or capital improvement plan (CIP), but they can be used for design, engineering, surveys, etc. associated with a specific qualifying project listed in a CFP or CIP.

Population ≤ 5,000 or Not Fully Planning Under GMA

Cities and counties that are not fully planning under GMA, or that are fully planning but have a population of 5,000 or less, must spend their REET 1 revenues “for any capital purpose identified in a capital improvements plan and local capital improvements, including those listed in RCW 35.43.040” (see RCW 82.46.010(2)(a)).

RCW 35.43.040 lists local improvements that can be funded through a local improvement district (LID), which includes projects such as streets, parks, sewers, water mains, swimming pools, and gymnasiums. Local capital improvements include the acquisition of real and personal property associated with such improvements – so for instance, land acquisition for parks is a permitted expenditure.

Capital projects not listed in the local improvement statute (for example, a fire station, city hall, courthouse, or library) are also permitted uses as long as they are included in the city’s capital improvement plan (CIP).

Expenditures that are not allowed are such things as the purchase of police cars or backhoes. Accountants may consider these to be “capital” for accounting purposes, but they are not considered “capital purposes” or “local capital improvements” as defined in the REET statute. See correspondence between Allen R. Hancock, Deputy Prosecuting Attorney of Island County and Philip H. Austin, Senior Deputy Attorney General (1984).

In addition, a portion of the REET 1 proceeds may be used for the maintenance of capital facilities as described below, with additional reporting requirements.

Note that REET 1 funds may not be used for developing or updating a capital improvement plan, but they can be used for design, engineering, surveys, etc. associated with a specific qualifying project listed in a CIP.


REET 2 – The Second Quarter Percent

In addition to REET 1, any city or town that is fully planning under the Growth Management Act (GMA) may impose an additional 0.25% real estate excise tax – known as “REET 2” or the “second quarter percent” (RCW 82.46.035). If a county imposes this tax, it is applied within the unincorporated areas only. Unlike REET 1, there are no differences based on population size.

For jurisdictions that are required to fully plan under GMA, REET 2 may be imposed by the legislative body and does not require voter approval. However, any jurisdiction that is voluntarily choosing to plan under GMA must submit the REET 2 proposition to voters.

REET 2 revenues are restricted and may only be used for financing “capital projects” specified in the capital facilities plan element of the city’s comprehensive land use plan. RCW 82.46.035(5) defines “capital project” as:

(a) Planning, acquisition, construction, reconstruction, repair, replacement, rehabilitation, or improvement of streets, roads, highways, sidewalks, street and road lighting systems, traffic signals, bridges, domestic water systems, storm and sanitary sewer systems;

(b) Planning, construction, reconstruction, repair, rehabilitation, or improvement of parks; and

(c) Until January 1, 2026, planning, acquisition, construction, reconstruction, repair, replacement, rehabilitation, or improvement of facilities for those experiencing homelessness and affordable housing projects.

However, the use of funds for affordable housing and homelessness in subsection (5)(c) is subject to certain limitations described below.

Note that the definition of “capital project” for REET 2 is more restrictive than it is in the REET 1 statute. REET 2 funds are more specifically directed to infrastructure and parks capital projects. (However, note that park lands “acquisition” is not an allowed use for REET 2.) REET 2 omits public facilities such as law enforcement, fire protection, libraries, administration, and courts that were listed within the REET 1 statute.

However, REET 2 funds may be used for REET 1 projects, as well as REET 2 maintenance, subject to certain limitations described below.

REET 2 funds may not be used for developing or updating a capital facilities plan (CFP) or capital improvement plan (CIP), but they can be used for design, engineering, surveys, etc. associated with a specific qualifying project listed in a CFP or CIP.


Using REET 1 and REET 2 for Maintenance

Cities, towns, and counties may use a portion of their REET 1 and REET 2 funds for capital project maintenance, subject to limitations and reporting requirements as described below. Some REET 2 funds may also be used to fund REET 1 projects, subject to the same conditions and reporting.

The definition of "maintenance" is the same for both REET 1 (RCW 82.46.015) and REET 2 (RCW 82.46.037):

For purposes of this section, “maintenance” means the use of funds for labor and materials that will preserve, prevent the decline of, or extend the useful life of a capital project. “Maintenance” does not include labor or material costs for routine operations of a capital project [emphasis added].

Using REET 1 for Maintenance

Any city, town, or county, regardless of its population or whether it fully plans under GMA, may use up to $100,000 or 25% of its available REET 1 funds – whichever is greater, but not to exceed $1 million per year – for the maintenance of REET 1 capital projects (RCW 82.46.015). The definition of capital projects is the same as in RCW 82.46.010(6)(b).

Using REET 2 for Maintenance and REET 1 Projects

Similarly, any city, town, or county that is fully planning under GMA may use up to $100,000 or 25% of its available REET 2 funds – whichever is greater, but not to exceed $1 million per year – for the following purposes (RCW 82.46.037):

  • The maintenance of REET 2 capital projects, as defined in RCW 82.46.035(5).
  • Planning, acquisition, construction, reconstruction, repair, replacement, rehabilitation, improvement, or maintenance of REET 1 capital projects that are not also included within the REET 2 definition of capital projects.

Reporting Requirements

To use REET 1 and/or REET 2 funds for maintenance, the city or county must fulfill additional reporting requirements defined within RCW 82.46.015 (REET 1) and RCW 82.46.037 (REET 2), including preparing and adopting a written report that includes:

  • Information necessary to demonstrate that the city has, or will have, adequate funding from all sources to pay for all capital projects identified in its capital facilities plan;
  • How revenues collected under REET 1 and/or REET 2 have been used during the prior two-year period;
  • How revenues collected under REET 1 and/or REET 2 will be used for the succeeding two-year period; and
  • What percentage of funds for capital projects is attributed to REET 1 and/or REET 2 revenues compared to all other sources of capital project funding.

This report must be adopted as part of the public budget process. Additionally, the local government must declare that it has not enacted any requirement on the listing or sale of real property; or any requirement on landlords, at the time of executing a lease, to perform or provide physical improvements or modifications to real property or fixtures, except if necessary to address an immediate threat to health or safety; unless the requirement is specifically authorized by other state and federal laws.


Using REET 2 for Affordable Housing and Homelessness

New legislation in 2019 expanded the use of revenues for homeless housing to also include affordable housing (RCW 82.46.035(6)). Until January 1, 2026 any city may now use up to $100,000 or 25% of its available REET 2 funds – whichever is greater, but not to exceed $1 million – for affordable housing projects and the planning, acquisition, construction, reconstruction, repair, replacement, rehabilitation, or improvement of facilities for those experiencing homelessness, as long as such projects are listed in the capital facilities plan. (These dollar limits do not apply to any city that used REET 2 revenue for homeless housing prior to June 30, 2019.)

To use REET 2 for affordable housing and homelessness, the city must document in its capital facilities plan that it has funds during the next two years for capital projects in subsection (5)(a) of the section – which is to say, all REET 2-eligible capital projects except park projects (which are listed in subsection (5)(b)). Note that these documentation requirements are much less stringent than the reporting requirements necessary to use REET 2 for maintenance/REET 1 projects.


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