A newly passed tax policy bill is headed to Governor Bob Ferguson’s desk that would update Washington’s capital gains and estate tax laws while increasing funding for public education, early learning, childcare, and higher education programs. The legislation — ESSB 5813 — passed both chambers of the Legislature in close votes and now awaits the governor’s signature. If signed, the bill will take effect immediately, with most changes applying to the 2025 tax year.
Capital Gains Tax Changes
Washington currently imposes a 7% excise tax on long-term capital gains above a $270,000 standard deduction. ESSB 5813 would adjust this structure beginning in 2025 (for gains reportable in 2026):
-
- 7% on Washington capital gains up to $1 million
-
- An additional 2.9% on gains over $1 million, for a combined effective rate of 9.9% on amounts exceeding that threshold
The tax applies to long-term capital gains from assets allocated to Washington, with existing exemptions for real estate, retirement accounts, and other categories unchanged. Revenue from this tax continues to be deposited into the Education Legacy Trust Account (ELTA).
Additional details:
Loss carryforwards used for federal tax purposes can be applied to state capital gains calculations, while loss carrybacks are not permitted.
State Estate Tax Adjustments
The bill also makes substantial updates to Washington’s estate tax, which is imposed on the value of taxable estates when a resident dies or when a non-resident owns property in the state:
-
- Raises the exclusion amount — the portion of an estate exempt from taxation — from $2.193 million to $3 million for deaths occurring on or after July 1, 2025
-
- Resumes annual inflation adjustments to the exclusion amount beginning in 2026, using a consumer price index for the Seattle metropolitan area
-
- Adopts a new marginal tax rate schedule for taxable estates above $3 million:
-
- Tax rates start at 15% on the first $1 million of taxable estate value above the $3 million exemption
-
- Rates increase in brackets, up to a maximum 35% marginal rate for amounts exceeding $9 million
-
- Adopts a new marginal tax rate schedule for taxable estates above $3 million:
Example impact on an estate of $5 Million:
-
- Before 7/1/2025: For an estate valued at $5 million, the first $2.193 million is exempt, and the Washington tax due would be $361,050.
-
- After 7/1/2025: For an estate valued at $5 million, the first $3 million is exempt, and the Washington tax due would be $250,000.
Example impact on an estate of $10 Million:
-
- Before 7/1/2025: For an estate valued at $10 million, the first $2.193 million is exempt, and the Washington tax due would be $1,257,365.
-
- After 7/1/2025: For an estate valued at $10 million, the first $3 million is exempt, and the Washington tax due would be $1,330,000.
Example impact on an estate of $20 Million:
-
- Before 7/1/2025: For an estate valued at $20 million, the first $2.193 million is exempt, and the Washington tax due would be $3,251,400.
-
- After 7/1/2025: For an estate valued at $20 million, the first $3 million is exempt, and the Washington tax due would be $4,730,000.
As you can see in these examples, smaller estates will now have a lower Washington estate tax bill and larger estates will have a higher estate tax bill. Notably, the new estate tax system will not take into account gifts made during life for Washington state estate tax purposes.
Changes to Family-Owned Business and Farm Deductions
The legislation expands deductions for family-owned businesses and farms:
-
- Increases the deduction for Qualifying Family-Owned Business Interests (QFOBI) from $2.5 million to $3 million starting July 1, 2025
-
- Indexes the QFOBI deduction to inflation beginning in 2026
-
- Adds a “qualified nonfamilial heir” provision, allowing long-term farm employees who materially participated in farming operations to qualify for existing estate tax deductions when inheriting farm property
The bill also clarifies the requirements for maintaining deductions — including potential recapture taxes if farming operations are discontinued or property is sold within three years of the decedent’s death.
Next Steps
If Governor Ferguson signs ESSB 5813, it will take effect immediately. The updated capital gains tax rates would apply to gains earned in 2025 and reported in 2026, while estate tax changes would apply to estates of decedents passing away on or after July 1, 2025.
