Cities in Washington State will offer tax breaks for office-to-residential conversions

A law passed earlier this year by the Washington State Legislature allows developers to defer sales and use taxes if they convert existing structures, including office buildings, into affordable housing.

The law passed almost unanimously in the legislature. The state’s Department of Revenue has said that it expects to have preliminary guidance for local jurisdictions in August. Cities could launch a tax deferment program for conversions after that.

Cities and towns will be able to issue their own resolutions for sales and use tax deferrals, but they will have to follow the guidance from the Department of Revenue. To receive a deferral, a project must consist of multifamily housing units with at least 10% considered affordable, and a project must be located on what the city considers underutilized commercial property.

If a project retains those qualifications for at least 10 years, owners would not have to repay sales and use taxes. City councils in Seattle and Spokane have already indicated support for the new law.

As remote work rose and demand for office space declined since the start of the Covid-19 pandemic, developers have found converting some offices to residential use to be an attractive option. Apartment conversions rose 25% in the two years since the start of the pandemic, with 28,000 new units converted from other property types, according to a report from RentCafe.

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