Policy Points: Real Estate Excise Tax

In 2023, NAIOP Washington State successfully defeated a bill during the legislative session that would have increased the real estate excise tax (REET). We anticipate similar legislation during the 2024 Washington State Legislative Session. During this session, REET may be rebranded as a “transfer tax.”  While we were previously successful in our efforts to stop a REET increase from moving forward, NAIOPWA’s Government Affairs team is actively engaged to defeat its passage once again.

What is REET?

REET stands for Real Estate Excise Tax and is sometimes referred to as a transfer tax. REET is a tax that is imposed on the sale of real property. The tax is applied to the full value of the real property – not on net profits during ownership. Washington State has one of the highest REETs in the country. In 2020, a graduated REET went into effect in the state, substantially increasing the tax.    At the highest tier, the tax increase that went into effect in 2020 represented a 134% tax increase.

Most of the revenue collected from REET goes towards the state’s general fund. Local governments have the option to adopt a REET that is in addition to the state REET.

Why is the Washington state legislature looking at REET/transfer tax proposals?

In theory, an increase to  the state REET would provide added revenue for the state. Recently, the Washington Office of Financial Management recently increased their projected revenue collections for 2023 – 2025 by nearly $200M, making the need to rely on a new tax increase unclear.

However, making the cost of development and investment  higher stifles new projects and slows down sale activity.  REET collections have shown that this is not a stable source of revenue upon which to depend.

What is the effect of REET increases?

REETs increase the cost of developing and selling real estate projects, plain and simple. Increased cost often means the difference between a project working or not working – we can see from the dip in multifamily housing starts over the last year just how devastating these added costs can be.  According to the Washington Center for Real Estate Research at the University of Washington, permit issuance statewide in Q3 2023 is down 20% year over year. Permit issuance in King and Snohomish Counties is down almost 40%. It’s common knowledge that Washington is facing the worst housing crisis it has seen in recent history.  By making development more costly than it already is, we face an ever harder uphill battle toward affordability.

In addition to slower economic activity overall, the 2020 graduated REET implementation has hampered commercial real estate transactions. In May 2023, taxable real estate sales statewide were 50% below taxable real estate sales in May 2022. Locally, the Seattle Office of Economic and Revenue Forecasts anticipates that REET collections in 2023 will be only 53% of what REET collections were in 2022. Increasing REET in the state has led to a downward trend in revenue collection from the tax.

I’m not a developer. Why should I care about REET?

Developers, like hospitals or grocery stores, provide essential goods and services to our communities. They are responsible for creating housing, retail spaces, office buildings, research facilities, warehouses, and manufacturing and distribution facilities that are fundamental to a healthy economy. Without these spaces, people would not have homes to live in, places to work, or many of the necessities of life. Profitability is a necessary incentive for providing these essential goods.

Additionally, the profit made from real estate development benefits everyday Americans via retirement funds. Currently, more than 20% of the Washington State CTF, the state public retirement plans for teachers, firefighters, law enforcement, and other professions, is invested in real estate. Washingtonians benefit from the returns made on development and investment, and a transfer tax increase would diminish those returns.

Moreover, the graduated REET structure has a disproportionate impact on rental housing relative to for-sale housing. As a result of the graduated structure, tax is assessed on the total value of the transaction, not the value per unit. This means that multi-unit buildings are taxed at higher rates on a per unit basis than are individually owned units. REET taxes on an apartment unit are 2.5 times – or more – greater than the REET taxes on a similarly valued single family house. This disproportionately and negatively impacts market rate rental housing affordability.

Why does NAIOPWA oppose REET?

NAIOP Washington State is a non-partisan organization. We serve over 1,165 members in all sectors of the commercial real estate industry – from developers and property managers to engineers, architects, brokers, and contractors. Our mission is to advocate for a climate that encourages responsible, successful development.  Real estate excise taxes/transfer taxes will significantly reduce commercial real estate investment and development in Washington State.  By standing in opposition to tax hikes like these, we seek to protect everyone involved in the commercial real estate industry. 

Washington can’t afford higher REET in 2024.

NAIOPWA is a leading voice for commercial real estate advocacy in Washington State. To contribute to our Government Affairs program, visit naiopwa.org/advocacy.

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