---
title: Washington Capital Gains - Document Now to Ensure Your Exemptions Aren't Denied Later
description: Document Now to Ensure Your Exemptions Aren't Denied Later
image: https://blog.sweeneyconrad.com/hubfs/Cap%20Gains%20Tax%20Blog.jpeg
---
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# Washington Capital Gains - Document Now to Ensure Your Exemptions Aren't Denied Later
By Rachel Roberson, CPA | May 25, 2023
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INSIGHTS/BLOG
Far too many businesses end up paying more taxes than they should due to insufficient records documenting exemptions and deductions that they otherwise would be entitled to take. While the capital gains tax is new, we expect the Department of Revenue to apply a similar strict interpretation of sufficient records in audits. Since it’s easier to create or request documentation at the time of a transaction, rather than four or five years later, now is the time to build your documentation file.
Gains from the direct sale of real estate are exempt from Washington’s capital gains tax. For individuals who sell real estate held in their own name, documentation may be as simple as the closing paperwork substantiating a sale took place. However if the real estate is held in an entity, the paper trail will be more complex.
#### Gain from the ***sale of real estate*** owned by an entity
When real estate is sold by a pass-through entity (ex. LLC or s-corporation) the gain is passed through to the individual owners via a K-1 statement. Often these statements show the net long-term capital gain for the full year, and don’t break down the gains/losses based on transactions.
If you suspect that some of the gain is related to the direct sale of real estate by the entity, ask for a statement or documentation supporting the gain related to this sale. Information that is helpful in determining whether an exemption applies is the address of the real estate sold, total gain on the transaction and/or the amount of the real estate gain included on the individual’s K-1.
#### Gain from the ***sale of an entity holding real estate***
In certain situations, this gain may be exempt. Generally, it will apply when an individual sells an interest in a directly held, private entity and some or all of the resulting gain was directly related to the value of the real estate held by that entity. If this exemption is taken, additional supporting documentation must be included with the tax return. So gathering this information now will ensure your accounting advisor will be able to claim this exemption if available.
Information that will be helpful includes the name of the entity, the percentage of ownership sold by the individual, the address(es) of the related real estate held by that entity and any agreements covering how gain/losses are allocated between owners. A statement of the fair market value of the real estate, its basis, the percentage of interest sold and the methodology used to allocate the gain amongst owners is required on the tax return. This information will be used to determine the amount of the total gain that is exempt from capital gains taxes in Washington.
The Department of Revenue is expected to issue additional rules and guidance on this tax, so requirements may change. However one thing is certain, the more you can document any exemptions today, the better your audit odds will be in the future.
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