Passage of tax and revenue bills was the hallmark of the 2019 Washington State Legislative Session. The state is anticipating the collection of more than $23 billion in taxes over the next 10 years. Particularly alarming for housing affordability is Senate Bill 5998, which restructured the Real Estate Excise Tax (REET).
If you’re unfamiliar with REET, it is an excise tax that is paid by the seller when real estate is sold. The tax base is the selling price of real estate, without any deduction for mortgages, liens or other debts.
Currently, the REET sits at a flat rate of 1.28%. However, 2020 will bring a graduated REET based on the selling price of real estate:
- Up to $500,000, the tax will decrease from 1.28% to 1.10%
- $500,000 to $1.5 million will decrease slightly to 1.25%
- $1.5 million to $3 million range will see a substantial hike to 2.75%
- $3 million and above will also see an increase to 3%
It’s also worth reminding sellers that local governments are also able to impose a REET of their own, up to an additional 2.75% on the sale of property.
How does this translate to housing?
The lower end of the housing market will fare better under the new REET tax structure. To apply some math: If the total sale price is $600,000, then the first $500,000 is taxed at 1.10%. The remaining $100,000 is taxed at 1.28%. The seller would have to pay a $6,789 REET, whereas the seller would have had to pay $7,680 at the current structure. This results in a minimal $891 savings.
On the higher end of the housing market, we can apply the same math: If the total sale price is $4.4 million, then the first $500,000 is taxed at 1.10%. The next $1 million is taxed at 1.28%. The next $1.5 million is taxed at 2.75% and the final $1.4 million is taxed at 3%. The seller would then have to pay $101,550 under the new REET structure, whereas they would only have to pay $56,320 at the current REET rate. This results in an increase of $45,230.
The REET restructure could have very negative consequences for the housing market. We anticipate multi-family properties, such as apartment complexes, will be impacted the most by the graduated REET. Those selling apartment complexes will most likely increase the sales prices of their communities to offset the impact of the higher tax burden. This could translate to higher rent costs for tenants once the community is sold.
To illustrate the point, a search of apartment complexes in Vancouver shows 13 properties for sale, with seven properties sitting above the $3 million threshold. A 48-unit apartment building (3145 NE 53rd Street) is currently for sale for $9.8 million. If we applied the current REET, the buyer would pay $126,720 in taxes. Under the new REET, the tax burden increases by $136,830, to a total tax burden of $263,550. We could safety assume that the tax burden would be distributed over the 48-units for five years, which would mean each unit’s cost would increase by $91.51 per month. This would then be converted into an increase in rent per unit, per month, by almost $92 just to cover the new tax increase, holding all other variables (renovations, maintenance costs, etc.) constant. Again, this is just one example of how housing affordability could be threatened.
The graduated REET serves as a reminder that any increase in cost associated with housing can price individuals out of the market. The new REET has the potential to undermine local affordable housing efforts, essentially thwarting any local development incentives.
Ryan Makinster is the government affairs director for the BIA of Clark County. He can be reached at email@example.com.