2025 Legislative Updates to the Real Estate Excise Tax Program

Based on recent inquiries from local cities, towns, and counties, it appears many of you are already aware that there are changes coming to how your agency can use funds raised through Real Estate Excise Taxes (REET).

While there are several changes and modifications to the existing statutes, the focus of this blog will be on the ones that impact the use of those funds.

Background

Our REET webpage describes the local real estate taxes that cities, towns, and counties may levy:

• REET 1, or the “first quarter percent” – a 0.25% REET which may be imposed by any city, town, or county primarily for capital projects and limited maintenance;
• REET 2, or the “second quarter percent” – an additional 0.25% REET which may be imposed by any city, town, or county fully planning under the Growth Management Act, to be used primarily for capital projects and limited maintenance.

As noted, use of REET 1 or REET 2 funds is limited by statute. Passed in 2025, HB 1791 modifies statutes addressing local REET, which impacts how cities, towns, and counties may now use this funding.

The Biggest Change

Previously, REET 1 and REET 2 had somewhat different (if overlapping) allowable uses, which created a lot of confusion. HB 1791 provides a much greater degree of flexibility by allowing any REET 1 revenues to be used for any REET 2 purposes and vice versa.

Both REET 1 (RCW 82.46.010) and REET 2 (RCW 82.46.035) still contain somewhat different definitions of “capital projects” that the revenues may be used for. However, the bill adds this new language to RCW 82.46.010: "A county or city may use available funds under this section [REET 1] for any eligible use in RCW 82.46.035 [REET 2]."

 HB 1791 also adds new language to RCW 82.46.035 stating that REET 2 revenues may also be used for “any use allowed under RCW 82.46.010 [REET 1]."

This means, for example, that the acquisition of parks and construction of administrative facilities previously not allowed under REET 2 will now be allowed.

Additionally, the local capital improvements listed in RCW 35.43.040 are no longer limited to cities or counties with a population of 5,000 or less and any city or county that does not plan under RCW 36.70A.040. Rather, that capital improvements list is applicable to all cities and counties — any distinction on the use of REET funds between jurisdictions based on size or planning obligations has been removed.

Changes Specific to REET 1

The use of REET 1 to fund the maintenance of, operation of, and service support for existing capital projects (that meet the definition of capital project), including services to residents of affordable housing or shelter units under RCW 82.46.015 is revised with HB 1791.

Most recently, the use of REET 1 for maintenance of capital projects was limited to $100,000 or 25% of available funds, with a cap of $1,000,000 per year. This threshold has been changed to $100,000 or 35% of available funds, with no cap.

Additionally, while some provisions of RCW 82.46.015 still remain in place, the reporting requirements have been eliminated.

Changes Specific to REET 2

Under RCW 82.46.035(5)(c), local governments were allowed until January 1, 2026, to use REET 2 funds for the:

planning, acquisition, construction, reconstruction, repair, replacement, rehabilitation, or improvement of facilities for those experiencing homelessness and affordable housing projects.

The threshold for use of REET II funds was $100,000 or 25% of available funds for those capital projects, not to exceed $1,000,000. Under HB 1791, the expiration date and the $1,000,000 cap have been removed. Additionally, a new section has been added to RCW 82.46.035 that allows REET 2 funds to be used towards projects supported through an interlocal housing collaboration as established under chapter 39.34 RCW, such as affordable housing projects or facilities for individuals experiencing homelessness.

Amendments have also been made to RCW 82.46.037. This includes an increase to 35% of available REET 2 funds and removal of the $1,000,000 cap for “the operation of, the maintenance of, and service support for, existing capital projects as included in the definition of capital project in RCW 82.46.035(4) and RCW 82.46.010(6)(b),” subject to meeting existing requirements. Additionally, reporting requirements once found in RCW 82.46.037 have been eliminated.

The language requiring REET 2 funds be “deposited in a separate account after December 31, 2023,” has also been eliminated.

Conclusion

All changes covered in this blog are effective as of July 27, 2025, so if you have a project that may not qualify today, it may qualify on the effective date. The new (and updated) statutes should be carefully reviewed, and local governments should confer with legal counsel if they believe that they may have a qualifying project. And, of course, MRSC is available to provide guidance as well.