Washington's 7% capital gains tax does not apply to home sales — real estate is exempt by law. Here's what federal taxes Washington home sellers actually face, and how the federal exclusion protects most sellers.
Written by Isaac Ortiz · Real Estate Broker · Compass | NWMLS #146754
Washington enacted a 7% capital gains tax on long-term capital gains in 2022 (RCW 82.87), which the state Supreme Court upheld in 2023. If you've heard about this tax and wondered whether it applies to selling your home, the answer is no. RCW 82.87.040(2)(a) explicitly exempts real estate transactions — home sales are not subject to Washington's 7% capital gains tax regardless of how large your profit is. The tax applies to other capital gains (stocks, bonds, and business interests over $250,000 per year), not to home or real property sales. Many sellers encounter news coverage of the WA capital gains tax and assume it applies to them — this article explains what taxes Washington home sellers actually face.
Home sales are subject to federal capital gains tax, but federal law provides significant protection for primary residence sellers through IRC §121. If you have owned your home and used it as your primary residence for at least 2 of the last 5 years, you can exclude up to $250,000 of profit from federal capital gains tax if filing single, or up to $500,000 if married filing jointly. The 2-of-5 years do not need to be consecutive — any 24 months within the prior 5-year window qualify. For most PNW sellers who have lived in their home for several years, this exclusion covers the entire gain, even after the significant appreciation the region has seen. You can use the exclusion once every 2 years; if you recently used it on a prior home sale, a reduced exclusion may apply based on how much time has passed.
The federal exclusion has limits. If your total gain exceeds $250,000 (single) or $500,000 (married), you owe federal capital gains tax on the excess at your long-term capital gains rate — typically 0%, 15%, or 20% depending on your total taxable income — plus a 3.8% Net Investment Income Tax (NIIT) if your income exceeds certain thresholds ($200,000 single / $250,000 married filing jointly). The exclusion also doesn't apply if the property wasn't your primary residence: rental properties and second homes don't qualify for §121, and the full gain is taxable at capital gains rates. If you've owned for less than 2 years, a partial exclusion may be available in qualifying circumstances such as a job relocation, health-related move, or other unforeseen circumstance.
While capital gains tax only applies to profit above the exclusion threshold, Washington's Real Estate Excise Tax (REET) is charged on every home sale at closing — calculated on the full sale price, not on profit. REET uses graduated brackets: 1.1% on the portion of the price up to $525,000; 1.28% from $525,001 to $1,525,000; 2.75% from $1,525,001 to $3,025,000; and 3.0% above $3,025,000. On a $750,000 sale, REET comes to approximately $8,927. REET is the seller's responsibility and is deducted from proceeds at closing — it appears as a line item on your settlement statement. Unlike capital gains tax, REET is owed whether you made a profit or a loss on the sale. This is distinct from any capital gains exposure and should be factored into your net-proceeds calculation before you list.
Before calculating whether your gain exceeds the federal exclusion threshold, determine your adjusted cost basis. Your basis starts with what you paid for the home, but it can be increased by capital improvements — permanent additions or upgrades that extend the useful life of the home or add value. Qualifying improvements include room additions, kitchen or bathroom remodels, a new roof, HVAC replacement, added square footage, and major landscaping. Routine maintenance (painting, minor repairs, appliance replacements) does not increase basis. Example: if you bought at $450,000, spent $75,000 on a kitchen remodel and new roof, and sell at $900,000, your gain is $375,000 against an adjusted basis of $525,000. A married couple would owe no federal capital gains tax on this; a single seller would exclude $250,000 and owe capital gains tax on the remaining $125,000. Keeping records of capital improvements is straightforward — save receipts and permits — and can meaningfully reduce your tax exposure if your gain approaches the exclusion threshold.
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