Following a four-hour debate, the capital gains tax bill (Senate Bill 5096) passed out of the Senate this past Saturday on 25-24 vote. Three members of the Democratic caucus voted no: Sens. Annette Cleveland of Vancouver, Steve Hobbs of Lake Stevens, and Mark Mullet of Issaquah.

While WSDA opposes this bill, our biggest concerns around the potential impact the tax could have on the vast majority of our members when selling their dental practice(s) have been addressed at this time. Under the current version of the bill, the first $250,000 of capital gains in a year is exempt from the 7% tax, as well as all sales or exchanges of real estate. Additionally, the sale of a small business is also exempt, provided the small business qualifies as a “family-owned small business.” Please note that you do not need to own a business with a family member to qualify for this exemption.

A qualified family-owned business is a business where:

• the owner of the business held a qualifying interest for at least eight years immediately before the sale or transfer of the business;
• the owner of the business or their family member(s), or both, materially participated* in operating the business for at least five of the last eight years preceding the sale or transfer of the business;
• the business had worldwide gross revenue of $10 million or less in the 12-month period preceding the sale or transfer of the business — beginning with taxes due and payable in 2024, the $10 million amount is adjusted annually by inflation.

* “Materially participated” means an individual was involved in the operation of a business on a basis that is regular, continuous, and substantial.

It is also important to note that the bill’s emergency clause, which would disallow voters a chance to file a referendum, was removed. So, in its current version, the citizens of Washington state could file a referendum measure to repeal the tax. This is a positive development as our state’s voters have rejected the idea of a capital gains tax 11 times after it was declared unconstitutional by the Washington State Supreme Court in 1933. However, the House could decide to add it back in.

WSDA will continue to provide updates on this bill as it moves through the legislative process.