Capital Gains & Taxes When Selling a Home in Washington State

Selling a home is often one of the largest financial moves a homeowner will make, yet taxes are one of the least understood parts of the process. Many sellers worry they’ll owe significant taxes simply because their home has appreciated in value. In Washington State, however, the tax picture is often more favorable than people expect especially when federal capital gains exclusions and Washington’s unique tax structure are properly understood.

This guide explains how capital gains are calculated, how long you typically need to own a home to qualify for exclusions, how Washington State treats capital gains differently than many other states, and what sellers should know about Washington’s Real Estate Excise Tax before closing.

What Capital Gains Mean When You Sell a Home

Capital gains refer to the profit you make when you sell an asset for more than you paid for it. For homeowners, this profit may be subject to federal capital gains tax unless you qualify for an exclusion.

Under IRS Section 121, most homeowners can exclude a significant amount of profit from taxation if the home was their primary residence. According to the Internal Revenue Service, homeowners may exclude up to $250,000 of capital gains if filing as a single taxpayer, or up to $500,000 if married filing jointly. To qualify, you must have owned and lived in the home for at least two years within the five years prior to selling. These two years do not need to be consecutive.

How Capital Gains Are Calculated

Capital gains are not calculated simply by subtracting what you paid from what you sold for. Instead, the IRS looks at your adjusted cost basis, which often works in the seller’s favor.

Your capital gain is calculated as:

• Sale Price
  
  
• Minus Adjusted Cost Basis
  
  
• Equals capital gain
  
  

Your adjusted cost basis generally includes your original purchase price, documented capital improvements such as remodels or additions, and certain selling expenses like real estate commissions. Because improvements and selling costs increase your basis, keeping good records can significantly reduce your taxable gain.

Before estimating potential capital gains or net proceeds, it’s important to understand how accurate online home value estimates really are and why relying solely on them can be misleading. Can You Trust Your Zillow Estimate will go over everything you need to know when you are researching your homes value.

Once your gain is calculated, any applicable IRS exclusion is applied. If your gain falls below the exclusion threshold, you may owe no federal capital gains tax at all.

Washington State and Capital Gains on Real Estate

One of the most important things Washington homeowners should know is that Washington State does not tax capital gains from the sale of real estate.

While Washington enacted a capital gains tax on certain assets such as stocks, bonds, and business interests, real estate is explicitly exempt. The Washington State Department of Revenue clearly confirms that gains from selling real property are not subject to Washington’s capital gains tax.

This means that even high-value home sales in Washington are not subject to state capital gains tax a major advantage compared to many other states.

The Washington State Real Estate Excise Tax (REET)

Although Washington does not tax capital gains on real estate, sellers are still responsible for a Real Estate Excise Tax, commonly referred to as REET. This tax is often confused with capital gains tax, but it works very differently.

The excise tax is a transaction-based tax calculated on the sale price of the property, not on your profit. It is typically paid by the seller at closing and applies to nearly all real estate transfers unless a specific exemption applies.

Washington uses a graduated REET structure, meaning different portions of the sale price are taxed at different rates. Beginning in 2026, the state portion of Washington’s REET is structured as follows:

• 1.10% on the first $500,000
  
  
• 1.28% on the portion from $500,000 to $1,500,000
  
  
• 2.75% on the portion from $1,500,000 to $3,000,000
  
  
• 3.00% on the portion above $3,000,000
  
  

In addition to the state tax, cities and counties may impose a local REET, which is commonly around 0.25%–0.50% in many areas, including King County. 

Example: Selling a $1.1 Million Home in Washington State

To put this into real-world context, let’s walk through a simplified example.

Assume you sell a Washington home for $1,100,000 and it was your primary residence.

Federal Capital Gains Example

• Sale price: $1,100,000
  
  
• Adjusted cost basis (purchase price + improvements + selling costs): $700,000
  
  
• Total gain: $400,000
  
  

If you are married filing jointly and meet the IRS two-out-of-five-year ownership and use rule, the entire $400,000 gain may be excluded, resulting in no federal capital gains tax.

Washington State Excise Tax Example

Using the 2026 state REET rates:

• 1.10% on the first $500,000 = $5,500
  
  
• 1.28% on the remaining $600,000 = $7,680
  
  

State REET total: $13,180

If the property is located in a city with an additional 0.50% local REET, that would add approximately $5,500.

Estimated total excise tax: $18,680

Exact totals vary by city and county, but this example reflects what many sellers in King County may expect.

How Long You Should Own a Home Before Selling

Washington State does not require a minimum holding period for real estate to avoid state capital gains tax, since real estate gains are exempt. However, federal rules still matter.

To qualify for the IRS capital gains exclusion, you must meet the two-year ownership and use requirement within the last five years. Selling before meeting this threshold could result in taxable gains unless you qualify for a partial exclusion due to qualifying life events such as a job relocation or unforeseen hardship.

Final Thoughts for Washington Home Sellers

For many homeowners, selling a home in Washington is far less tax-burdensome than expected. Federal exclusions often eliminate capital gains tax entirely on primary residences, and Washington’s exemption of real estate from state capital gains tax is a significant advantage. The primary tax sellers should plan for is the Real Estate Excise Tax, which is based on the sale price rather than profit.

Understanding how these taxes work and planning ahead allows sellers to protect more of their equity, price strategically, and move through closing without surprises. As with any tax-related decision, consulting a qualified tax professional is always recommended for personalized guidance.

RaeAnne Marcum REAL BROKER: Team Lead 📍 Seattle | Bellevue | Kirkland 509.521.5323 raeannemarcum.com