Capital Gains Tax When Selling a House: How Much Will You Owe in Washington

Worried about how much tax you might owe when selling your home in Washington State? Many homeowners — especially those downsizing in Seattle or selling inherited property in Tacoma — face surprises with capital gains on home sale. This guide breaks down what capital gains tax is, who has to pay it, and the key rules like the primary residence exclusion that can keep more money in your pocket. ³

Key Takeaways

• Most homeowners pay no federal capital gains tax when selling a primary home if they meet IRS rules. You can exclude up to $250,000 in profit if single and $500,000 if married filing jointly under the Taxpayer Relief Act of 1997.
• To qualify, you must own and live in your home for at least two out of the last five years before selling — passing the "ownership test" and "use test." Military members may get extended time due to duty assignments.
• Washington State does not have a traditional income tax, but it does impose a capital gains excise tax on gains above $270,000 (as of 2024) at a flat 7% rate — though the sale of real estate used as a primary residence is currently exempt from this state tax.
• Your taxable gain is your sale price minus cost basis (purchase price plus major improvements). Keep all receipts. Example: buy at $200,000 + $50,000 improvements = $250,000 basis; sell at $500,000 = $250,000 gain.
• Short-term federal gains (owned under one year) are taxed as ordinary income — up to 37%. Long-term gains are taxed at 0%, 15%, or 20% depending on income. Always consult a CPA familiar with Washington tax law (IRS Pub. 523).

A homeowner downsizing or inheriting a property worries about capital gains taxes reducing their profits.

Selling your home during a major life change — such as downsizing from a Bellevue house or inheriting a property in Spokane — can raise serious concerns about capital gains taxes. The Internal Revenue Service applies capital gains tax to the profit you make on real estate sales: the selling price minus your cost basis, improvements, and fees. ¹

Homeowners who have lived in their primary residence for at least two years may qualify for an exclusion of up to $250,000 if single or $500,000 if married filing jointly. Washington's strong real estate market — particularly in the Seattle metro area — means many sellers are sitting on significant gains, making these exclusions especially important to understand.

If you inherited a house and are thinking of selling, the stepped-up basis rule often provides relief by resetting your cost basis to the property's market value at the date of death — significantly reducing your taxable gain. Keep detailed records including Form 1099-S from closing and receipts for any home improvements.

What Is Capital Gains Tax?

Capital gains tax is a federal income tax you pay when you sell real estate for more than your cost basis. Washington homeowners also need to be aware of the state's capital gains excise tax, though real estate used as a primary residence is currently exempt from that state-level tax.

Profit from the sale of a home, calculated as the selling price minus purchase price, improvements, and selling costs.

You calculate profit from a home sale by subtracting your purchase price, major improvements, and selling costs from the final selling price. The IRS calls this your "capital gain." For example, if you sell a Seattle home for $700,000 but paid $400,000 and spent $40,000 on improvements, your cost basis is $440,000. If you pay $42,000 in commissions and legal fees, that further reduces your taxable gain. ²

Only profits above your adjusted basis count as taxable gain. You must report these figures using Form 1099-S or include them on Schedule D with Form 1040 if required by the IRS.

Taxed as income, with rates depending on ownership duration.

Short-term capital gains apply if you owned your home for one year or less — taxed as ordinary income up to 37%. Long-term capital gains apply after more than one year of ownership, with federal rates of 0%, 15%, or 20% based on your total income and filing status. Washington does not have a general state income tax, but its capital gains excise tax (enacted in 2021 and upheld by the Washington Supreme Court in 2023) applies a flat 7% on long-term capital gains above $270,000 — with a key exemption for gains from the sale of a primary residence.

The Primary Residence Exclusion

You can shield a large portion of your capital gains from federal taxes under the primary residence exclusion in the Taxpayer Relief Act of 1997. For Washington sellers in high-appreciation markets like Seattle, Bellevue, and Kirkland, this exclusion can mean tens of thousands of dollars in tax savings.

Single homeowners can exclude up to $250,000, and married couples up to $500,000, from taxable gains.

Single homeowners may exclude up to $250,000 of gain from the sale of a primary residence under Internal Revenue Code Section 121. ³ Married couples filing jointly qualify for up to $500,000 if both meet ownership and use tests. If your gain stays under these limits, no federal capital gains tax applies — and Washington's real estate primary residence exemption means you also avoid the state's 7% capital gains excise tax.

Eligibility: Owned the home for 2+ years and lived there at least 2 of the last 5 years.

To qualify, you must pass both the ownership and use tests — owning and living in your home for at least two of the last five years before the sale. ⁵ The two years do not need to be consecutive. You cannot claim this exclusion if you used it on another home sale within the past two years. Military and certain government personnel may receive an extended test period of up to ten years.

Example: A $300,000 gain could be tax-free, whereas a $600,000 gain is taxed on $100,000.

Say you bought your Tacoma home for $200,000 and sold it for $500,000. Your gain is $300,000. As a single homeowner who meets the IRS tests, the exclusion covers the entire amount — no federal capital gains tax due.

If you are married filing jointly and sell with a $600,000 gain, the IRS lets you exclude up to $500,000. Only $100,000 remains taxable at long-term capital gains rates of 0%, 15%, or 20% depending on income. Washington's primary residence exemption shields you from the state's capital gains excise tax in either scenario.

Short-Term vs. Long-Term Capital Gains

Short-term gains (sold within a year) are taxed at higher ordinary income rates.

Selling your home within a year of purchase triggers short-term capital gains taxed at ordinary income rates — up to 37% federally. Washington has no general state income tax to add on top, but if you are selling an investment property (not a primary residence), the state's 7% capital gains excise tax could also apply on gains above the threshold. Always report your profit using Schedule D and Form 8949 on your federal return.

Long-term gains (owned for over a year) are taxed at lower rates of 0%, 15%, or 20%.

If you own your home for over a year before selling, the IRS treats profit as long-term capital gains. For 2025, single filers pay 0% up to $48,350 in total income; 15% between $48,351 and $533,400; and 20% above that. Married couples filing jointly pay 0% up to $96,700 and 15% up to $600,050. Washington's primary residence exemption from the state capital gains excise tax adds further relief for most homeowners.

Understanding Cost Basis

Cost basis includes the original purchase price plus major improvements like a new roof or HVAC.

Your cost basis starts with what you paid to buy your home, then grows with the cost of major capital improvements — a new roof, HVAC system, added square footage, or kitchen remodel. These must be supported by receipts, permits, or invoices. Routine repairs like painting do not count. ⁶

For example, if you purchased a Spokane home for $200,000 and spent $50,000 on qualifying improvements, your cost basis rises to $250,000 — directly reducing your taxable gain at sale.

Add closing costs and realtor fees to the cost basis.

Certain closing costs — title charges, legal fees tied to the purchase, and settlement fees — can be added to your cost basis. ² Realtor commissions paid at sale are subtracted from your sale price rather than added to the basis. Knowing which costs go where helps lower your taxable gain and reduces potential capital gains tax liability.

Example: A $200,000 purchase with $50,000 in improvements increases the cost basis to $250,000.

If you buy a home for $200,000, add $50,000 in major improvements, and sell for $500,000, your capital gain is $250,000 — not $300,000. That difference in documented improvements could mean the difference between a taxable gain and a fully excluded one under federal rules. Keep all receipts and permits in case the IRS asks for documentation.

Special Situations to Consider

Inherited homes: Stepped-up basis adjusts the value to the market rate at inheritance.

If you inherit a home in Washington, the IRS allows you to reset the property's cost basis to its fair market value on the date of death — the stepped-up basis. ⁸ For example, if your parent bought their Seattle home for $150,000 but it was worth $700,000 when they passed, your new cost basis becomes $700,000. This dramatically reduces — or eliminates — taxable gain when you sell.

Washington is a community property state, which means both halves of jointly owned property may receive a stepped-up basis at the death of one spouse — a potentially significant tax advantage compared to non-community property states. Get a qualified appraisal at the time of inheritance and keep it on file to support your basis calculation on Form 1099-S.

Divorce: Special rules apply for dividing property and exclusions.

Transfers of real estate between divorcing spouses — within one year of the divorce decree, or as required by a settlement agreement within six years — generally do not trigger capital gains taxes. ⁹ Washington's community property laws affect how marital assets are divided, and a Washington family law attorney or CPA familiar with both state property rules and federal tax law should be consulted before any property transfer or sale during divorce proceedings.

If both spouses sell the primary residence before finalizing the divorce, each may qualify for a portion of the capital gains exclusion based on ownership and residency. The spouse who retains the home takes on its original cost basis for future tax calculations.

Rental properties: Depreciation recapture can increase taxes when selling.

Selling a rental property in Washington triggers depreciation recapture at the federal level — taxed as ordinary income at a maximum rate of 25%. ¹⁰ Washington's capital gains excise tax may also apply to gains from rental property sales above the $270,000 threshold, since the primary residence exemption does not cover investment properties.

A 1031 like-kind exchange lets you defer both capital gains and depreciation recapture taxes by reinvesting in a similar property. Strict IRS deadlines apply: identify your replacement property within 45 days and close within 180 days. Consult a CPA experienced in Washington real estate before listing any investment property.

Selling due to job loss, health, or unforeseen circumstances: Partial exclusions may apply.

If you must sell your Washington home early due to job loss, illness, or another qualifying unforeseen circumstance, the IRS may allow a prorated capital gains exclusion even if you haven't met the full two-year use test. ¹¹ The calculation is: (qualifying months lived in home ÷ 24) × maximum exclusion. A single filer who lived in their home for 12 months before a qualifying forced sale could exclude up to $125,000 in gains. Document the reason for early sale carefully and review IRS Publication 523 for qualifying circumstances.

Calculating Potential Capital Gains Tax

Step-by-step example: Selling for $500,000 with a $300,000 cost basis results in $200,000 in gains.

Sell your home for $500,000 with a cost basis of $300,000 and your capital gain is $200,000. Subtract selling costs — say $15,000 in agent commissions — and your net taxable gain falls further. If you are a single homeowner who meets the IRS ownership and use tests, the $250,000 federal exclusion eliminates any federal capital gains tax. Washington's primary residence exemption also removes any state capital gains excise tax liability. Report all figures on Schedule D and Form 8949 even if no tax is owed.

Apply exclusions to determine taxable gains.

Subtract your applicable exclusion ($250,000 single / $500,000 married filing jointly) from your gain. Only the amount above the exclusion is federally taxable. For Washington sellers, confirm that the property qualifies for the state's primary residence exemption from the 7% capital gains excise tax. Higher-income filers with gains above the exclusion may also owe a 3.8% federal Net Investment Income Tax if their modified adjusted gross income exceeds $200,000 (single) or $250,000 (married).

Ways to Reduce Your Tax Burden

Time the sale to meet long-term ownership requirements.

Hold your home for over one year to qualify for lower long-term federal capital gains rates. Staying through the full two-year mark also opens up the primary residence exclusion. Given Washington's appreciation rates — especially in the greater Seattle area — timing your sale to maximize exclusions can save significant money. The exclusion is available once every two years per taxpayer.

Keep detailed records of home improvements and selling costs.

Save every receipt, invoice, permit, and contractor document from your home improvements. Only capital improvements — new roof, HVAC, additions — count toward raising your cost basis; routine repairs do not. ¹² Track all selling expenses including agent commissions and closing fees. Accurate documentation protects you if the IRS questions your reported gain and ensures you get every allowable deduction.

Use 1031 exchanges for investment properties.

A 1031 like-kind exchange lets Washington real estate investors defer capital gains and depreciation recapture taxes by reinvesting sale proceeds into another qualifying property. You must identify a replacement property within 45 days and close within 180 days of the original sale. ¹³ This strategy is especially useful in Washington where investment property values have risen sharply in markets like Seattle and Bellevue.

Consider installment sales to spread taxes over time.

An installment sale allows you to receive payment over several years, spreading your taxable gain across multiple tax returns and potentially keeping annual income in lower brackets. IRS Publication 537 and Form 6252 govern these arrangements. The primary residence exclusion still applies first — only remaining gain is spread across installment payments. A CPA familiar with Washington tax law can help structure this approach correctly.

Washington State Capital Gains Tax: What You Need to Know

Washington State enacted a capital gains excise tax in 2021, which was upheld by the Washington Supreme Court in 2023. Key facts for homeowners:

• Rate: 7% flat on long-term capital gains above $270,000 (threshold adjusted periodically for inflation).
• Primary residence exemption: Gains from the sale of a primary residence are exempt from Washington's capital gains excise tax — consistent with the federal exclusion.
• Investment and rental property: Gains from selling investment real estate, rental property, or second homes may be subject to the 7% state tax on gains exceeding the threshold.
• Filing: Washington's capital gains excise tax is filed separately with the Washington Department of Revenue, not as part of a state income tax return (Washington has no general income tax).
• No state income tax: Washington does not impose a general personal income tax, so short-term capital gains are not taxed at the state level beyond the capital gains excise tax framework.

Always verify current thresholds and exemption rules with the Washington Department of Revenue or a qualified CPA, as these figures can change.

Conclusion

Most homeowners owe little to no capital gains tax due to exclusions.

Most Washington homeowners do not pay federal capital gains tax on home sales because of the primary residence exclusion — up to $250,000 for single filers and $500,000 for married couples filing jointly under the Taxpayer Relief Act of 1997. Washington's own capital gains excise tax also exempts primary residence sales. You must meet both the ownership and use tests — owning and living in your home for at least two of the last five years. Careful record-keeping of improvements and selling costs helps ensure you maximize these benefits.

Consult a CPA for personalized advice and tax planning.

A CPA familiar with both federal rules and Washington's capital gains excise tax can help you determine your exact exclusion eligibility, calculate your adjusted cost basis, and identify strategies like installment sales or 1031 exchanges. Bring receipts for improvements, your purchase and closing documents, and any Form 1099-S received at closing. If life events — job loss, divorce, or inheritance — complicate your situation, professional guidance is especially valuable in Washington's unique tax environment.

Selling as-is to a cash buyer simplifies the process and ensures clear proceeds for tax planning.

Selling your Washington home as-is to a cash buyer removes the uncertainty of repairs, inspections, and delayed closings. You receive a clear, defined sale amount — making it straightforward to calculate your taxable gain, apply your exclusion, and plan for any tax due. Cash sales often close in days rather than months, and you avoid the unpredictability that comes with financed buyers in competitive markets like Seattle or Tacoma.

If you're thinking about selling your Washington home and want to understand your options, KDS Homebuyers offers fair, no-obligation cash offers that let you move forward on your timeline. Visit kdshomebuyers.net to get your free cash offer today — and consult your CPA to understand exactly how the proceeds fit into your tax picture.

FAQs

1. What is capital gains tax in Washington real estate home sales?

Capital gains tax applies federally when you sell a house for more than your cost basis. Washington also has a 7% capital gains excise tax on long-term gains above $270,000, but the sale of a primary residence is currently exempt from that state tax.

2. How does the primary residence exclusion work for Washington homeowners?

If you meet the federal ownership and use tests, you can exclude up to $250,000 (single) or $500,000 (married filing jointly) from federal capital gains tax. Washington's capital gains excise tax also exempts primary residence sales, so most homeowners owe nothing at the state level either.

3. Does Washington have a state income tax on capital gains from home sales?

Washington has no general state income tax. However, it does impose a 7% capital gains excise tax on long-term gains above $270,000. The primary residence exemption means most home sellers are not affected by this state tax.

4. Can I reduce my taxable gain by claiming home improvements?

Yes. Qualifying capital improvements — new roof, HVAC, additions — are added to your cost basis and reduce your taxable gain. Keep all receipts, permits, and invoices to document these costs for IRS purposes.

5. How does Washington's community property status affect inherited homes?

Washington is a community property state. When one spouse dies, both halves of jointly owned community property may receive a stepped-up basis to fair market value — potentially eliminating capital gains on the entire property value when the surviving spouse sells.

6. Do I need to file separately with Washington for capital gains?

If your long-term capital gains exceed the threshold and your sale is not exempt (e.g., investment property), you must file Washington's capital gains excise tax return separately with the Washington Department of Revenue. This is distinct from federal filing and from any state income tax return, since Washington has no general income tax.

References

1. ^ https://finance.yahoo.com/news/im-selling-house-netting-640k-120000169.html (2025-09-22)
2. ^ https://tullyelderlaw.com/blog/selling-home-capital-gains-taxes-part-1/
3. ^ https://www.anthemeap.com/barclays/find-legal-support/resources/taxes-and-audits/legal-assist/avoiding-capital-gains-tax-when-selling-your-home-read-the-fine-print
4. ^ https://www.irs.gov/taxtopics/tc701 (2026-01-22)
5. ^ https://www.brightonjones.com/blog/2-out-of-5-year-rule/ (2025-08-27)
6. ^ https://www.rocketmortgage.com/learn/cost-basis-real-estate
7. ^ https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/property-basis-sale-of-home-etc-3
8. ^ https://www.investopedia.com/terms/s/stepupinbasis.asp
9. ^ https://www.divorcenet.com/resources/divorce/capital-gains-tax-sell-house-divorce.htm
10. ^ https://www.natptax.com/news-insights/blog/depreciation-recapture-can-increase-taxes-on-the-sale-of-a-residential-rental-property