This page provides a general overview of state laws authorizing the real estate excise tax, key spending requirements, and sample ordinances.
RCW 82.46.010 authorizes all cities and counties to levy a 0.25% tax, described as "the first quarter percent of the real estate excise tax" or "REET 1" on all sales of real estate.
RCW 82.46.035 allows all cities and counties that are planning under the Growth Management Act (GMA) to have the authority to levy a second 0.25% tax (REET 2), on all sales of real estate.
REET 1: Spending the First Quarter Percent
Cities and Counties Not Planning Under GMA or Are Planning and Have a Population of 5,000 or Less
According to RCW 82.46.010(2), these jurisdictions must use REET 1 funds "for any capital purpose identified in a capital improvements plan and local capital improvements, including those listed in RCW 35.43.040." RCW 35.43.040 additionally lists local improvements that can be funded through a local improvement district (LID), which includes projects such as streets, parks, sewers, water mains, swimming pools, and gymnasiums. Local capital improvements include the acquisition of real and personal property associated with such improvements, thus, land acquisition for parks is a permitted expenditure.
Capital projects not listed in the local improvement statute (for example, a fire station, city hall, courthouse, or library) are also permitted uses as long as they are included in the city's or county's capital improvement plan. Expenditures that are not allowed are such things as the purchase of police cars. Accountants may consider these to be "capital" for accounting purposes, but they are not "capital purposes" or "local capital improvements." See correspondence between Allen R. Hancock, Deputy Prosecuting Attorney of Island County and Philip H. Austin, Senior Deputy Attorney General.
Cities and Counties Planning Under GMA With a Population of More than 5,000
These jurisdictions must spend the first quarter percent of their real estate excise tax receipts solely on capital projects that are listed in the capital facilities plan element of their comprehensive plan. RCW 82.46.010(6) defines "capital projects" as:
those public works projects of a local government for planning, acquisition, construction, reconstruction, repair, replacement, rehabilitation, or improvement of streets; roads; highways; sidewalks; street and road lighting systems; traffic signals; bridges; domestic water systems; storm and sanitary sewer systems; parks; recreational facilities; law enforcement facilities; fire protection facilities; trails; libraries; administrative facilities, judicial facilities, river flood control projects…
REET 2: Spending the Second Quarter Percent
This part of the real estate excise tax may only be levied by cities and counties that are required to or choose to plan under GMA. All cities and counties that levy this tax face the same provisions, whether their population is greater or less than 5,000.
For this 0.25% of the real estate excise tax, "capital project" is defined in RCW 82.46.035(5).as:
public works projects of a local government for planning, acquisition, construction, reconstruction, repair, replacement, rehabilitation, or improvement of streets, roads, highways, sidewalks, street and road lighting systems, traffic signals, bridges, domestic water systems, storm and sanitary sewer systems, and planning, construction, reconstruction, repair, rehabilitation, or improvement of parks.
Note that acquisition of land for parks is not an outright permitted use of REET 2 receipts, although it is a permitted use for street, water, and sewer projects.
As of September 2015, under limited circumstances, REET 2 funds may be used for those capital projects that qualify as REET 1 projects, including acquisition of land for parks, recreational facilities; law enforcement facilities; fire protection facilities; trails; libraries; administrative facilities, judicial facilities, and river flood control projects. The dollar limit on the use of REET 2 funds for such purposes is the greater of $100,000 or 25% of available funds, not to exceed $1 million per year. The use of REET 2 funds for these purposes also requires additional reporting requirements.
Limited Use of REET 1 and 2 Funds for Maintenance
Note: During the 2015 legislative session, the state legislature placed significant additional restrictions on the use of REET funds for maintenance. However, local governments can continue to use REET funds for maintenance under the preexisting rules that will sunset on December 31, 2016. MRSC recommends that local governments continue to use REET funds for maintenance under the preexisting rules and prepare to transition to the new rules by December 31, 2016.
Prior to December 31, 2016
(7) and 82.46.035
(7) allow cities and counties to use REET 1 revenues for operations and maintenance (O&M) of existing REET 1 eligible capital projects and REET 2 revenues for O&M of existing REET 2 eligible capital projects. There is a limit, however, on how much can be spent on O&M. The maximum amount of each REET fund that may be spent on O&M is the greater of $100,000 or 35 % of the available funds, not to exceed $1 million per year. This legislation sunsets on December 31, 2016.
After December 31, 2016
After the sunset date of December 31, 2016, there are additional limitations on the use of REET funding for maintenance. These new limitations include:
Definition of Maintenance: The definition of maintenance is limited. RCW 82.46.015 (5) defines maintenance as:
the use of funds for labor and materials that will preserve, prevent the decline of, or extend the useful life of a capital project. Maintenance does not include labor or material costs for routine operations of a capital project (emphasis added).
Dollar Limit: The maximum amount of either REET 1 or REET 2 that may be spent on maintenance is the greater of $100,000 or 25% of the available funds, not to exceed $1 million per year.
Reporting Requirements: The local government must prepare a written report demonstrating that it has, or will have, adequate funding from all sources of public funding to pay for all capital projects identified in its capital facilities plan for a two-year period. This report must be adopted as part of the city’s or county’s regular budget process and must include:
- Information necessary to demonstrate that the local government has, or will have, adequate funding from all sources to pay for all capital projects identified in its capital facilities plan.
- How revenues collected under REET 1 and REET 2 have been used during the prior two-year period.
- How revenues collected under REET 1 and REET 2 will be used for the succeeding two-year period.
- What percentage of funds for capital projects is attributed to REET 1 and REET 2 revenues compared to all other source of capital project funding.
Posting of Disclosure Requirements: If the local government has imposed any requirements on landlords or sellers of real property to provide information to a buyer or tenant "pertaining to the subject property or to the surrounding area," the requirements must be posted on the MRSC website in accordance with RCW 43.110.030(2)(e).
Half Cent Tax Shown in RCW 82.46.010(3)
Cities and counties that are not levying the optional half-cent sales tax under RCW 82.14.030(2) have the option of levying an additional 0.5% real estate excise tax. These receipts are not designated for capital projects. They are a general fund revenue for city operating expenditures. Only two cities, Asotin and Clarkston, have chosen to do this. From a financial standpoint, the optional half-cent sales tax will probably bring in more revenue than this additional 0.5% real estate excise tax. For border cities and counties, however, who do not feel they are able to levy the optional sales tax, this tax is a revenue option.
The imposition of this tax, a change in rate, or a repeal of the tax is subject to the referendum procedures given in RCW 82.46.021.
One Percent Real Estate Excise Tax for Conservation Areas
A county legislative authority may submit a ballot proposition to the voters for an additional real estate excise tax on each sale of real property in the county at a rate not to exceed 1% of the selling price. The revenue from this tax is restricted to the acquisition and maintenance of conservation areas. Conservation areas are defined in RCW 36.32.570 as:
land and water that has environmental, agricultural, aesthetic, cultural, scientific, historic, scenic, or low-intensity recreational value for existing and future generations, and includes, but is not limited to, open spaces, wetlands, marshes, aquifer recharge areas, shoreline areas, naturals areas, and other lands and waters that are important to preserve flora and fauna.
The property buyer, rather than the seller, pays this tax as outlined in RCW 82.46.070. Only San Juan County has levied this tax to date.
Accounting for REET Funds
Because this revenue source has a dedicated purpose, it must be accounted for separately in a capital projects fund. Those cities and counties that are planning under GMA and levying both REET 1 and REET 2 need to keep track of each of these revenues separately because the uses to which they may be put are different (RCW 82.46.030(2) and 82.46.035(4)). Although no special direction is given in the statutes as to how to account for funds collected under RCW 82.46.070 for conservation areas, these should be kept in a separate fund also.