The House Democrats proposed a budget that funds education but does so through a host of new taxation proposals aimed at property owners and businesses. Here is a brief rundown of the taxes that would affect our industry.
1) State Real Estate Excise Tax (REET) – estimate $419.7 million new revenue
The state REET would be changed from a uniform rate of 1.28% on the selling price, to a rate structure based on different price levels. Those levels are:
Selling Price REET
<$250,000 .75% (est. 67% of sales)
$250,000-$1million 1.28% (est. 30% of sales)
$1million – $5million 2.00% (est. 2.5% of sales)
>$5million 2.5% (est. .3% of sales)
2) 7% Capital Gains Income Tax – Est. $715 million new revenue
Capital gains income tax would be based on federally-reported capital gains income from stocks, bonds, multi-family investment property, commercial property and other capital assets. Retirement accounts, pensions, and single-family homes, and other capital assets would be exempt.
The state capital gains income tax would still apply to capital gains for which federal capital gains ta liability is deferred under a §1031 exchange.
3) Business and Occupation (B&O) Tax Increase from 1.5% to 1.8% – Est. $1.197 billion new revenue
The B&O tax rate on services and a number of other B&O tax classifications would be increased from 1/5% to 1/8%. The small business B&O tax credit threshold would be increased to $250,000 – meaning that businesses with gross receipts less than $250,000 would NOT be subject to B&O tax.
Businesses with taxable revenue between $250,000 and $500,000 would receive a B&O tax credit on the first $100,000 in otherwise taxable income.
Note that the changes in the B&O small business tax credit will not benefit most real estate brokers or firms, because taxable income is based not on the income of each individuals broker, but on the gross income of the real estate firm which is generally the “taxpayer.”
Based on 2015 WDOR B&O tax payments from real estate brokerage firms, a B&O increase from 1.5% to 1.8% would mean a tax increase of about $14 million/year.