December 16, 2025
Background
In the real estate world, properties are often put into separate LLCs for liability protection. For federal tax purposes, single member limited liability companies (SMLLCs) are not recognized as separate entities. However, for Washington state capital gain tax purposes, it is important that you consider the impact of SMLLCs when selling an interest in a partnership that owns real estate. An example from WAC 458-20-301 offers insight into how the Department of Revenue (DOR) views such transactions.
The Scenario: Example 19
The example describes Ken, a Washington resident, who owns 100% of Holding Company LLC. This holding company, in turn, owns three assets:
- 100% of First Avenue Tower LLC, which owns First Avenue Tower (commercial building, FMV $4,000,000, Basis $1,000,000)
- 100% of Second Avenue Tower LLC, which owns Second Avenue Tower (commercial building, FMV $8,000,000, Basis $5,000,000)
- 100% ownership of Third Avenue Tower directly (FMV $5,000,000, Basis $2,000,000)
Ken sells his entire interest in Holding Company LLC for $17,000,000, realizing a long-term capital gain of $9,000,000.
Tax Outcome
According to the DOR’s conclusion, Ken’s capital gain from the sale of Holding Company LLC is only partially exempt from Washington’s capital gains tax. Specifically:
- The gain associated with Third Avenue Tower, which the holding company owns directly, is exempt up to the difference between its fair market value and basis ($3,000,000).
- However, the $6M gain related to First Avenue Tower and Second Avenue Tower is not exempt, as these properties are held indirectly through SMLLCs. Thus, the proportion of the gain attributable to these assets does not qualify for the deduction.
Planning Opportunities
Before entering such a transaction, you may want to consider dissolving the SMLLCs into the parent (Holding Company LLC) before the sale. This would make those assets “directly” owned by the holding company, potentially qualifying more of the gain for exemption under Washington’s capital gains tax rules.
Conclusion
Washington’s approach distinguishes between assets owned directly and those owned indirectly through entities like SMLLCs. For the maximum exemption from the Washington state capital gains tax, it is important to consider entity structure before a sale.
If you have questions about Washington’s capital gains tax or would like personalized guidance on tax planning strategies, please don’t hesitate to contact a member of our tax team—we’re here to help.
© Clark Nuber PS, 2025. All rights reserved.
