Strategies for navigating Washington state capital gains tax in 2025

In November of 2024, Washington state voters rejected Initiative Measure No. 2109, which aimed to repeal the state’s capital gains tax. With the tax remaining in place, high-net-worth individuals must carefully evaluate its impact on their financial planning, investment strategies and estate planning.

Who is affected by capital gains tax?

Washington state imposes a 7% tax on the sale or exchange of certain long-term capital assets, including intangible assets, such as stocks and bonds. In 2024, taxpayers are allowed a deduction of $270,000 in calculating their capital gains subject to tax. The deduction amount is indexed annually for inflation and exempts capital gains under that threshold from tax. Married couples filing a joint federal return must also file jointly in Washington, and they are limited to a single $270,000 deduction on their joint return. However, the tax does not apply to the sale of real estate, transactions within retirement accounts, sales of livestock, sales of qualified family-owned small businesses and several other items.

Net long-term capital gain arises from the sale of assets held for greater than one year. For Washington state tax purposes, long-term capital gain is reduced by any long-term capital losses incurred since 2022. Notably, Washington does not allow short-term losses to offset long-term gains, which differs from federal tax treatment. This distinction is important for taxpayers when planning investment strategies and tax loss harvesting under the state’s capital gains tax framework.

An individual’s domicile or residency status in Washington plays a crucial role in determining whether the tax applies. For intangible asset sales, gains or losses are taxable in Washington if the individual is domiciled in the state. For tangible personal property sales, both the location of the property and the taxpayer’s residency status are considered.

An individual is considered domiciled in Washington if they intend to remain in the state indefinitely. A person is classified as a resident if they are domiciled in Washington, unless they (1) did not maintain a home in the state, (2) maintained a home in another state and (3) did not spend more than 30 days in Washington. Additionally, a person is deemed a resident if they were not domiciled in Washington but maintained a residence in the state and were present for more than 183 days.

Should you move to avoid the tax?

High-net-worth individuals often have property or connections to more than one state, making relocating outside of Washington a possible planning strategy to avoid Washington's capital gains tax. However, moving out of Washington does not necessarily provide immediate relief, as the sale of tangible property shortly after relocation could still trigger long-term capital gains tax. Additionally, changing one’s domicile is not a straightforward process. Taxpayers seeking to change their Washington domicile need to demonstrate that they intend to leave and not come back. Domicile determination is based on facts and circumstances, and there are multiple factors the state considers such as time spent in a location, places of business, family connections, location of property and many more. In short, the rules require careful planning with a knowledgeable adviser. Furthermore, relocating may not be the ideal solution. More than 30 states, including Oregon and California, tax capital gains at the same rate as ordinary income and tax a broader source of income than just capital gains, potentially resulting in an even higher tax burden depending on the state. State tax laws are always subject to change, making it crucial to stay informed and plan accordingly.

Washington capital gains tax and planned giving

Washington’s capital gains tax law is an important consideration when planning lifetime gifting strategies. One potential approach to avoiding the application of the capital gains tax is making outright gifts, i.e., transferring property to a recipient with no conditions attached. However, this strategy is most effective if the recipient is not domiciled in Washington, as the tax does not apply when a non-Washington domiciled recipient sells the asset. However, if the recipient is a Washington domiciliary, they may be able to shelter gain using their own $270,000 deduction. Keep in mind that while Washington state does not impose a gift tax, federal gift tax rules need to be considered.

 Another effective gifting strategy involves transferring appreciated assets to a trust. Currently, Washington does not impose capital gains tax on assets held within an irrevocable non-grantor trust, making it a potential tool for tax-efficient wealth transfer. However, this exemption does not apply to assets placed in a grantor trust. In such cases, any gains realized from the sale of appreciated assets are taxed directly to the grantor rather than the trust. Careful trust structuring and planning are essential to maximize tax benefits while aligning with broader estate and financial goals.

In some cases, it may be more advantageous to transfer appreciated assets at the time of death rather than during one’s lifetime. This strategy allows beneficiaries to inherit assets with a “stepped-up basis,” effectively eliminating built-in capital gains and reducing the tax burden that would otherwise apply if the assets were sold during life. However, taxpayers and their advisers need to consider Washington’s estate tax and carefully balance income tax savings with potential state estate tax exposure.

Navigating Washington’s capital gains tax rules can be complex, particularly when factoring in estate planning considerations. Individuals who anticipate exceeding the $270,000 deduction should consult with an experienced tax professional, financial advisor or CPA to develop a strategy that minimizes liabilities while protecting their financial future and estate.

Questions? Connect with our team to learn more.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.