Capital gains tax on selling a home in Washington

“How much will I owe in taxes if I sell?” is one of the first questions a seller asks. For a Washington homeowner the answer is usually better than they expect — but it has a federal layer and a state layer, and conflating them is where agents get it wrong. Here's the clean version.

Federal: the Section 121 exclusion

On a primary residence, federal law lets a seller exclude up to $250,000 of gain ($500,000 if married filing jointly) if they owned and lived in the home for at least 2 of the last 5 years (the “2-of-5” rule). Gain above the exclusion is taxed at federal long-term capital-gains rates (typically 0/15/20% by income). Most owner- occupants who sell never owe federal capital gains at all.

Washington state: no income tax, and real estate is exempt

Washington has no state income tax, so there's no ordinary state tax on the gain. WA does have a 7% capital gains tax on certain long-term gains above a threshold — but it explicitly exempts real estate. Selling a home (or any real property) is not subject to Washington's capital gains tax. Between no income tax and the real-estate exemption, the state layer on a home sale is effectively zero.

It all comes down to basis

“Gain” isn't the sale price — it's sale price minus cost basis. Basis is the original purchase price plus capital improvements (a new roof, addition, remodel — not routine repairs), plus certain buying/selling costs. A seller who kept receipts for 15 years of improvements often has a far higher basis (and far lower taxable gain) than they assume. If the home was ever a rental, depreciation taken reduces basis and can trigger depreciation recapture — a CPA question.

What this means at the listing table

For most WA owner-occupants: the $250k/$500k federal exclusion covers the gain, and there's no Washington capital gains tax on the sale. The sellers most likely to owe something are high-gain long-tenure owners over the federal exclusion, investors selling a rental, or someone who hasn't met the 2-of-5 rule. Those are exactly the cases to route to a CPA early.

Note this is separate from REET, the excise tax the seller pays at closing regardless of gain — see the REET calculator for that figure.