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Capital Gains Tax

Taxing Home Appreciation

A capital gains tax is a federal tax charged on the increased value of a privately owned asset when it is sold. The asset could be a car, boat, house, land or even stocks and bonds. Many of us have sold large assets like cars and boats and not paid this tax and that is because it is unusual for a car or boat to appreciate over time.

When you own real estate it is very likely that you will realize capital gains over time. Capital gains tax isn't something that you pay periodically like you would property tax, you only pay capital gains tax when you sell the asset. If you own an asset for less than a year and you sell it, you will pay capital gains tax at the same rate as your income tax. This is a short term investment and it is considered income.

If you hold onto an investment for longer than one year, it is considered a long term investment and it is taxed at a lower rate. Capital gains tax for a long term investment is taxed at a rate of Zero, 15% or 20% depending on your income tax bracket. The vast majority of taxpayers will fall into the 15% bracket when it comes to capital gains tax. You only pay the tax based on the capital gains. To calculate the capital gains you take the sale price, subtract the purchase price and also subtract any cost of any capital improvements.

The way that the tax laws are written right now, your primary residence is exempt from capital gains tax. The new tax reform bill that becomes effective for the tax year of 2018 still has this exemption.

The basic rules of the exemption are as follows: You are required to own the home for at least 2 years. You also are required to have lived in the home for a minimum of 2 years within the 5 years previous to the sale of your home. The limit of exemptible gains is $250,000 for a single tax filer and $500,000 for a married couple filing joint. The actual gains are not required to be reinvested in any particular way; the money can be spent however you want. You may not use this exemption on a sale that closes within two years of the last time that you used it.

Here are a couple of examples of how you could use these rules for a tax advantage: If you lived in your home for at least 2 years and relocated but kept your home as a rental income property but still sold it within 3 years of moving out, you would not owe a capital gains tax. If you owned a piece of rental income property and moved into it when it became vacant, as long as you lived there for at least 2 years before it sold, you would be exempt from paying a capital gains tax.

Investment property, rental income property and vacation property are not eligible for this exemption. If you sell a peace of investment property and roll the proceeds into another investment property, you can avoid paying capital gains tax with a 1031 exchange. The 1031 exchange program has rules that apply to it too.

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Hirst Decision

Wells and Building Permits

In order for the county to issue a building permit for a home there needs to be an available water source. The majority of the time this will be a municipal water supply but it is common for rural homes to depend on wells for their water.

Because ground water is a resource that can easily flow from one parcel to the next it is a resource that is not owned by the property owner but shared by all the people and governed by the state. The state agency in Washington that manages surface and ground water is the Department of Ecology.

RCW 19.27.097 prohibits the initiation of a well that will impair more senior water rights or reduce the flow of rivers or streams. Well use permits are granted recorded and controlled by the Department of Ecology. Up until a couple of years ago, when you got a well use permit from the Department of Ecology you had a water source.

In October of 2016 the Washington State Supreme Court ruled against Whatcom County because they failed to ensure that new private wells did not reduce water flow to the Nooksack River. The private wells in question were all permitted by the Department of Ecology.

This meant that counties would take on the responsibility for something that a state agency had already approved. The result has been counties being reluctant to issue building permits for rural home construction. This had an impact on rural land values as well as the construction industry.

On January 19, 2018 the State Legislation passed a bill that reversed the 2016 State Supreme Court Hirst ruling against Whatcom County and local governments will no longer be required to review well permits issued by the Department of Ecology. The responsibility for meeting requirements of the Growth Management Act and ensuring that private wells do not impair instream flows is placed back with the Department of Ecology.

There are restrictions for water quantities drawn from private wells in many water shed areas of the state. These restrictions are reviewed, they can be changed and new ones can be added.

At this time there is only one restricted water shed area that affects Spokane County and the restriction is quite liberal. It is the Little Spokane River Watershed north of town and the private well restriction is 3,000 gallons per day at this time. There are many areas on the west side of the state with 950 gallon per day restrictions.

The only way to determine how much water is being drawn out of a private well is to install a water meter on the well. At this time private use residential wells using less than 5,000 gallons per day are exempt from any water meter requirement. This may change sometime in the future. A meter requirement would likely be imposed on the more restricted watershed areas before the lesser restricted ones. Meter requirements would also logically be imposed on new wells before existing well but there is no "grandfather clause" in regards to water meters on private wells.

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Manito Park in the fall