Posts tagged Michelle Green
New REET Rate Structure Begins January 2020

In May of 2019, Governor Jay Inslee signed Senate Bill 5998, which will result in a graduated tiered scale for real estate excise taxes (“REET”) that will replace the previous flat state REET tax of 1.28%.

The following tiered structure takes effect on January 1, 2020:

  • 1.10% – Portion of selling price less than or equal to $500,000

  • 1.28% – Portion of selling price greater than $500,000 and equal to or less than $1.5 million

  • 2.75% – Portion of selling price greater than $1.5 million and equal to or less than $3 million

  • 3.00% – Portion of selling price greater than $3 million

Sales of timberland or agricultural land will remain subject to REET at a 1.28% state tax rate and may be subject to a local REET in addition to the state REET.  

Also included in this legislation is the following:

  • Beginning in 2022 and every fourth year thereafter, the REET thresholds may be adjusted to reflect the lesser of the growth of the consumer price index for shelter or 5%.  If the growth is equal to or less than 0%, the current selling price threshold will continue to apply. 

Another significant result from the legislation relates to the determination of a transfer of a controlling interest.  In Washington, REET applies to the direct transfer of real property, as well as the transfer of a “controlling interest” in an entity that holds real property.  For REET purposes, a transfer of a controlling interest is the combined transfer of 50% or more of the interests in an entity that owns real property.  This legislation changes the time period for determining whether a controlling interest has been transferred (triggering REET on the transfer of certain business interests) from 12 months to 36 months.  The legislation also requires the Washington Secretary of State to adopt rules requiring any entity that is required to file an annual report for the transfer of at least one-third of a controlling interest in an entity.

The result of these changes will be an increased number of transactions subject to REET, even though the overall 50% or more threshold to constitute a transfer of a controlling interest is not changing.

Please contact Michelle A. Green at JDSA Law with any questions about this new legislation or call (509) 662-3685.

Opportunities Abound in Local Opportunity Zones

Congress made several significant changes to the individual income tax when it passed the Tax Cuts and Jobs Act of 2017. The creation of the Opportunity Zone program is among these changes. This law, codified in the Internal Revenue Code, creates tax breaks and incentives for those who invest their money into designated “opportunity” zones. In short, the Opportunity Zone program is an economic development tool designed to spur economic development and job creation in distressed communities. An Opportunity Zone is a designated economically-distressed area where new investments, under certain conditions, may be eligible for preferential tax treatment. Our local officials in Chelan and Douglas County proactively sought the designation of a large number of properties within each of the counties as Opportunity Zones, which requests were ultimately approved by Governor Inslee among a total of 139 census tracts approved as Opportunity Zones in 36 counties within Washington. You can find these properties through this mapping feature.

In order to invest within an Opportunity Zone and qualify for these new tax breaks, an investor must first form a Qualified Opportunity Fund (“QOF”), which can be either a partnership (including limited liability companies) or a corporation. This fund is the vehicle which then makes the investments in the eligible property located in an Opportunity Zone. The tax benefits for these investments are reminiscent of the benefits associated with 1031 exchanges, but with the potential for even more advantageous tax breaks.


Deferring Tax on Capital Gains

Investors into Opportunity Zones can defer tax on prior capital gains invested into a QOF until the earlier of the date on which the investment in the QOF is sold, or December 31, 2026.

  • If the QOF is held for longer than five years, there is a 10% exclusion on the deferred gain

  • If the QOF is held for longer than seven years, there is an additional 5% (for a total of 15%) exclusion on capital gain

  • If the investor holds the investment in the QOF for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value – meaning that there would be no capital gains tax levied at all.


Requirements

In order to take advantage of the deferral, there are a few requirements.

  • The 180-Day Window. The investment into the QOF must be made within 180 days of the sale of other property. An investor cannot utilize the Opportunity Zone program if they already have the cash and simply want to invest. There has to be a triggering sale of property with capital gains and then a reinvestment of those funds within the 180-day window.

  • The Fund. The fund has to be set up in accordance with the Internal Revenue Code and the recently released proposed regulations. As noted above, the fund can be a partnership tax entity or a corporation. The QOF must designate a fund manager.

  • The Investment. The QOF must use at least 90% of the funds it receives to invest in qualifying property within an Opportunity Zone. The investment must improve existing property and/or consist of a new build. The investment can also be made into a new or existing business that is located within an Opportunity Zone.

  • The December 31, 2026 Window. The capital gains exclusion incentives are based on the length of time that the investment is held and time-capped as of the end of 2026. An investor can still invest in 2019 in order to hit the seven year window of time for exclusion of capital gains.


Conclusion

The tax breaks associated with the investment into Opportunity Zones could have a lasting impact on many taxpayers. An investor does not need to create their own fund and there are many funds all over the country, which are currently formed and trying to raise capital. If you are a property or business owner that has been considering a sale that would trigger capital gains, now may be a great time to sell and reinvest those funds into a QOF fund. On the flip side, if you are a property or business owner located in an Opportunity Zone, you should consider leveraging these tax incentives to get new investors. The Opportunity Zone regulations are complex. Investors considering the Opportunity Zone Program should consult with their attorney and tax adviser to ensure full compliance with the rules and regulations in order to achieve the maximum tax benefits contemplated under the Act.

Email Lindsey J. Weidenbach or Michelle A. Green at JDSA Law for assistance or call (509) 662-3685.

Legislative Bill to “Fix” Hirst

The wait is over. 

On January 19, 2018, the Washington State Legislature passed, and Governor Jay Inslee signed into law, a bill for issues facing rural homeowners stemming from the Washington State Supreme Court decision in Hirst.  Since the 2016 Hirst decision, Washington counties had been left with uncertainty regarding land use planning and liability in permitting – and many rural landowners were unable to obtain basic residential building permits if the residence would rely on a permit-exempt well.

What does this mean for water restrictions?

In short, rural homeowners and construction businesses are now able to more freely build on and develop plots of land that rely on well water, now that SB 6091 has become law. 

The legislation gives clarity to counties’ long-range planning, and a process to approve building permits and subdivisions as follows: 

  • A building permit applicant must pay permitting authorities $500 to build on a plot of land reliant on well water

  • Applicants building in basins with existing watershed planning may then be approved to use a permit-exempt well for domestic use for up to a yearly average of 3,000 gallons per day

  • Applicants building outside of those basins, may then be approved to draw up to 950 gallons per days out of their well

The measure also clarifies counties and cities may rely on Ecology’s instream flow rules when complying with the Growth Management Act (GMA) water availability standards.   However, be aware that if you are located in Skagit Count, there may be additional requirements under state law to observe.

While this decision may not be what everyone was hoping for, Governor Inslee stated in an online statement, “While far from perfect, this bill helps protect water resources while providing water for families in rural Washington”.

Permit-Exempt Wells

New Restrictions from The Washington State Supreme Court

There are new rules regarding permit-exempt wells that will restrict growth in some rural communities.

On October 6th, 2016, the Washington State Supreme Court made a ruling that impacts the responsibilities of counties within the State to review permit-exempt (household) wells in connection with building permits and subdivision applications.

A permit-exempt well is, as the name suggests, a well that does not require a water permit from the Department of Ecology.

The Court’s decision will effectively preclude counties from granting building permits and subdivision applications that intend to rely on household wells that will impair a minimum, in-stream flow (a rule set to protect river and stream flows at sufficient levels for fish). Essentially, if withdrawing water from the exempt well would drop a nearby stream level below minimum flow levels set by the Department of Ecology (Ecology), you can’t withdraw water.

So how does this affect you?

At the time of writing, it remains unclear. Primarily, the decision directs the counties to go beyond the in-stream flow rules adopted by Ecology, and conduct their own analysis when determining legal availability of water for rural development.

The result of this decision in many counties will be burdensome hydrogeology report requirements – even for a basic residential building permit on a rural property. It could mean blanket denials of all building permits and subdivision applications for properties within watersheds that are already fully appropriated. This in turn could mean long delays in receiving building and development permits – if any will be granted at all.

In counties with approved watershed plans that include “reserve water” in anticipation of future growth (such as Chelan County), the impacts of this Supreme Court decision will likely be much less extreme. However, regardless of where you live in our State, the landscape is changing rapidly with respect to water availability.  And, while the topic may be dry (pun intended), the decision has important ramifications for future growth within the State.

You’re probably wondering how this came about.

The Hirst decision arose from a lawsuit filed by a group of environmentalists against Whatcom County, alleging that Whatcom County was not satisfying its obligations under the Growth Management Act (GMA) by granting building permits that intended to rely upon household wells without conducting an independent analysis of water availability. Why? Because the GMA requires counties to ensure an adequate water supply exists before granting a building permit or subdivision application.

In its decision, the Supreme Court stated that an applicant for a residential building permit must produce proof that water is both legally available—and actually available—when the applicant is relying on a permit-exempt well.

For environmentalists, the decision is a big win. The decision squarely precludes the unchecked growth of single-family residences relying on permit-exempt wells in rural areas.  As stated by the Court in the decision, “this is precisely the ‘uncoordinated and unplanned growth’ that the legislature found to ‘pose a threat to the environment, sustainable economic development, and the health, safety, and high quality of life enjoyed by residents of this state.’”

Right now, the net result is counties cannot issue building permits unless there is water actually and legally available.

To learn more about this topic and the details of the ruling, read the full article. To better understand how this Supreme Court ruling may affect your permit application, call us today at JDSA Law.