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Understanding the CAPITAL GAINS TAX

As part of the 2017 Budget Proposal, Governor Inslee proposed a new 7.9% tax on capital gains income, similar to proposals in the Washington Legislature during the 2015 Session. While supporters of a capital gains income tax assert that it would apply only to assets that don’t currently generate any tax revenue for Washington State, or would impact only the “1%,” the reality is much different. Real estate and small businesses generate substantial tax revenues for Washington State and local government both during ownership and at sale.


Washington REALTORS® and the Washington Hospitality Association have analyzed how the proposed 7.9% state capital gains income tax would impact two common scenarios:  (1) the sale of a small rental property; and (2) the sale of a restaurant business.  This analysis shows that total taxes on the sale of real estate would be 45% of the gain, and for the sale of the restaurant business, taxes would be over 100% of the gain.  

Our point?  Real estate and small businesses already generate substantial tax revenues for Washington State and local governments during their ownership and sale.  The tables to the right show the tax impacts on these two examples under Governor Inslee’s 7.9% capital gains income tax proposal. 
 

Real Estate Example: 4-plex Housing
Couple (filing jointly) buys a modest 4-plex housing unit in 2000 for $550,000 as investment property for anticipated retirement.  Assume all units are same size and value.  The couple live in one of the units as their primary residence and rents out the other three units to supplement income and mortgage payments. The rental units are placed into service on 1/1/2000.  Upon retirement in 2017, the couple sells the 4-plex.  Sale price is $1,500,000.  

WA Capital Gains Tax (after exemption limit)

$60,114

WA State and Local REET at 1.78%

$26,700

Federal Capital Gains Tax and Recapture of Depreciation

$131,484

State and Local Property Taxes Paid During Ownership

$149,597

Total Taxes Paid During Ownership and at Sale

$367,895

Total Federal, State, and Local Taxes Paid as a % Gain

45%

 


Small Business Example:  Sale of Restaurant Business
Family buys small commercial building and opens restaurant in 1990. Purchase price is $200,000.  In 2000, family purchases second small commercial building in adjacent city and expands restaurant to second location. Purchase price for second building is $300,000.  Both restaurants employ and have employed 10 persons.  With the original owners nearing retirement, the family decides to sell the two restaurants: 

 

 

 

Original Restaurant/Building

 

Second Restaurant/Building

 

WA Capital Gains (after exemption limit)

 

$37,525

 

$29,805

 

State and Local REET, at 1.78%

 

$10,680

 

$10,680

 

Federal Capital Gains, Including Recaptured Depreciation

 

$123,750

 

$104,545

 

Total Taxes Paid on Sale

 

$171,955

 

$145,030

 

Historical Total Taxes Paid and Collected

 

Original Restaurant/Building

 

Second Restaurant/Building

 

State and Local Property Tax

 

$72,399

 

$81,598

 

State Personal Property Tax

 

$13,125

 

$10,625

 

WA B&O Tax

 

$118,576

 

$75,458

 

Unemployment Taxes (Assume 2%)

 

$79,200

 

$50,400

 

Worker's Comp (Rate $0.4134/hour)

 

$163,706

 

$104,177

 

Total Taxes Paid During Ownership and at Sale

 

$618,961

 

$467,288

 

Total Federal, State, and Local Taxes Paid as a % of Gains

 

118%

 

108%

 

Ironically, other forms of retirement income that have value similar to real estate or small business sales would be exempt from the proposed 7.9% capital gains income tax.  For example, consider a person who is a PERS 1 retiree or holder of a company pension, who has average life expectancy, a retirement based on a final salary of $65,000, and an annual retirement benefit of $39,000.  This person would receive total retirement income exceeding $500,000.  This amount exceeds the taxable gains from many typical sales of real estate or small businesses—and yet would be exempt from the proposed capital gains income tax. 

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