Washington State does not tax capital gains realized on the sale of real estate property. However, Washington does levy a Real Estate Excise Tax (REET), a type of real estate transfer tax. This means that when you sell a home in Washington, you may be responsible for this tax, which is based on the selling price of the property.
This doesn’t mean you’ll be exempt from federal taxes related to the sale of a home, though. You should consider both state and federal tax implications when selling a property. If you are unsure of your tax responsibilities when selling your home, consult with a tax professional.
Learn your real estate tax obligations and find out which taxes apply to your home sale, which exemptions you can benefit from, how to report your home sale, and how Washington taxes compare to other states.
Do You Pay Capital Gains Tax When Selling a Home in Washington?
The Washington State Department of Revenue (WA-DOR) has found that while the state does levy a capital gains tax, it does not apply to the sale or transfer of real estate. The WA-DOR website specifies that the property’s type, location, length of ownership, and occupation duration do not matter, confirming that all forms of real estate property are exempt from Washington’s capital gains tax.
The 4 Levels of Washington Taxes on Real Estate
When selling a real estate property in Washington, there are three primary tax considerations to keep in mind: the federal capital gains tax, a state-level transfer tax, and local transfer taxes.
1. Federal Capital Gains Taxes
Rate: Varies from 0% to 20%, depending on the taxpayer’s situation. The most common rate is 15%.
When selling real estate in Washington at a profit, you are required to pay federal capital gains tax.
If you realize gains on the sale of your home, you owe taxes to the federal government.
The IRS defines two types of capital gains: short-term and long-term. It is considered a short-term capital gain if you have owned the property for one year or less before selling it. If you’ve held it for over a year, it is a long-term capital gain instead.
Short-term capital gains are taxed as ordinary income, meaning the tax brackets for this type of gain are identical to those for standard federal income taxes.
Long-term capital gains tax brackets are calculated based on the seller’s filing status and income levels:
- 0% for taxpayers meeting the following conditions:
- The taxpayer’s filing status is “Single” or “Married Filing Separately” and their taxable income of $41,675 or less
- The taxpayer’s filing status is “Married Filing Jointly” or “Qualifying Surviving Spouse,” and their taxable income of $83,350 or less
- The taxpayer’s filing status is “Head of Household” and their taxable income of $55,800 or less
- 15% for taxpayers meeting the following conditions:
- The taxpayer’s filing status is “Single,” and their taxable income is over $41,675 but $459,750 or less
- The taxpayer’s filing status is “Married Filing Jointly” or “Qualifying Surviving Spouse,” and their taxable income is over $83,350 but $517,200 or less
- The taxpayer’s filing status is “Married Filing Separately,” and their taxable income is over $41,675 but $258,600 or less
- The taxpayer’s filing status is “Head of Household,” and their taxable income is over $55,800 but $488,500 or less
- 20% for taxpayers exceeding the maximum thresholds outlined for each respective filing status in the 15% category (e.g., taxpayer filing as single and earning over $459,750)
Paragraph 121 of the Internal Revenue Code (IRC) outlines exceptions to long-term capital gains taxes. Sellers can exclude up to $250,000 (or $500,000 for married couples filing jointly) on the gains realized following the sale of their home if they pass the “ownership and use tests.” You qualify for this exclusion if:
- The house sold was your primary residence
- You owned the home for two years or more
- You lived in the home and used it as your primary address for two years or more
How is the Federal Capital Gains Tax Calculated?
According to the National Association of Realtors, the median period of homeownership in the United States is 13 years. While the exact duration varies by area, it typically falls between 6 and 21 years. These stats show that most individuals selling a home in the United States will pay long-term federal capital gains taxes.
Example: Maya is a single taxpayer living in Spokane, WA. Her annual income is $102,000, and her residence is a single-family home she purchased five years ago for $200,000. While she owned it for five years, Maya used the home only in the last three years of ownership, during which she used it as her primary residence. Afterward, she sold the home to another buyer for $290,000. Maya has realized a long-term capital gain because she has owned the house for over a year. The total capital gains are $90,000.
Maya’s income and filing status mean she falls into the 15% federal tax bracket. Under normal circumstances, Maya would owe 15% of the capital gains she realized, or $13,500, to the federal government in capital gains taxes. However, Maya realized a long-term capital gain on the sale of a primary residence, qualifying her for the IRC Paragraph 121 federal exemption from capital gains taxes.
As a single taxpayer, Maya can exclude up to $250,000 of her capital gains from the federal tax. Because she earned less than this threshold, she can exclude 100% of the amount, allowing her to avoid paying federal capital gains taxes entirely.
2. Washington State Capital Gains Tax
Rate: 0%
The Washington State Department of Revenue (WA-DOR) states that while the state government levies a capital gains tax, state legislation specifies that sales and transfers of real estate property are fully exempt from this tax. This means that residents of the Evergreen State do not pay capital gains taxes on the sale of a house, nor does the state treat it as income.
3. Washington State Transfer Taxes
Rate: 1.10% to 3%
While the state of Washington does not impose capital gains taxes on real estate property sales and transfers, it does levy a transfer tax called the Real Estate Excise Tax (REET). According to WA-DOR, the Real Estate Excise Tax applies to sales and transfers of controlling interest in real property.
The Real Estate Excise Tax has two tiers: a state-level tax that applies on sales and transfers of controlling interest statewide and a Local Real Estate Excise Tax (Local REET), which applies in specific cities and counties.
The state-level REET is a progressive tax based on the property’s final sale price. As of January 1, 2023, the tax schedule is:
- 1.10% for properties sold with a total consideration of $525,000 or less
- 1.28% for properties sold with a consideration amount between $525,000.01 and $1,525,000
- 2.75% for properties sold with a consideration amount between $1,525,000.01 and $3,025,000
- 3% for properties sold with a consideration amount over $3,025,000
Under ordinary circumstances, WA-DOR considers the seller liable for paying the tax. If the seller does not pay, the buyer becomes liable instead. If the REET remains unpaid after the transfer, it can become a lien on the property transferred.
How is the Washington State Transfer Tax Calculated?
The Real Estate Excise Tax (REET) is calculated by taking a percentage of the real estate property’s sale value.
Example: Tom is a resident of Spokane, WA. He sold a two-family house to Anna for $749,000. The home’s value falls into the second tier of the Real Estate Excise Tax, meaning the state will collect 1.28% of the home’s sale price. In this case, the state-level REET for this property is $9,587.20. As Tom is the seller, he is liable for paying the tax.
4. Washington Local Transfer Taxes
Rate: 0.25% to 2%
The second tier of the Real Estate Excise Tax (REET) is a local-level transfer tax levied by either the county for unincorporated communities or each incorporated town or city within a county. For example, three local governments can levy the local REET in Columbia County, WA: the city of Dayton, WA, the town of Starbuck, WA, and the county government on behalf of unincorporated communities.
Most communities in the state of Washington levy the local-level REET, with rates varying between 0.25% and 2%. The local rate must be paid on top of the state-level transfer tax. For instance, if a property was sold in a city levying a local rate of 0.25%, the seller will owe both the state-level and local-level REET.
The Washington Department of Revenue (WA-DOR) maintains an up-to-date list of all local REET tax rates on its website. Refer to this table to determine your local transfer tax rates. If you do not live in one of the listed cities and towns, look for your county and check the rate listed next to the word “Unincorp,” which corresponds to the county’s tax rate for unincorporated communities.
Not all towns, cities, and unincorporated areas in Washington levy the local-level Real Estate Transfer Tax. Some towns, such as Krupp, WA, or Starbuck, WA, choose not to impose local transfer taxes on the sale of real estate property. The listed tax rate for these areas on the WA-DOR local transfer tax table is 0.00%.
Like the state-level tier, the seller is liable for paying the local-level REET. If the seller does not pay, the buyer becomes responsible for paying the tax. Unpaid local transfer taxes can also become a lien on transferred properties.
How is the Washington Local Transfer Tax calculated?
The local-level Real Estate Excise Tax (REET) is calculated as a percentage of the property’s final sale price.
Example: When Tom sold his two-family house in Spokane, WA, to Anna for $749,000, he needed to pay both the state-level REET and the local-level equivalent of the tax. The latest WA-DOR local transfer tax rate schedules lists the city of Spokane’s tax rate as 0.50%. As Tom is the seller, he is responsible for paying the local transfer tax to the city government. In this case, he owes 0.50% of the sale price to the city of Spokane, or $3,745. In total, Tom’s combined REET expenses for the sale of his Spokane house was $13,332.20.
Washington Exemptions and Deductions for Real Estate Taxes
Washington State offers several exemptions and deductions related to real estate taxes for those seeking to reduce their tax burden.
Washington Capital Gains Exemptions
The Washington State Department of Revenue states that the state’s capital gains tax does not apply to the sale of real estate property. Consequently, all individuals in the state selling real property are automatically exempt from paying it.
Washington Transfer Tax Exemptions
Washington state legislation outlines a list of possible exemptions to the Real Estate Excise Tax (REET):
1. Gift Transfers
Washington state law (WAC 458-61A-201) mentions that gifts of real estate property are exempt from the REET because they do not meet the definition of a sale. A transfer is considered a gift if no consideration is given in return, including non-monetary payments, such as valuable objects.
2. Inherited Properties
According to the Washington Administrative Codes (WAC 458-61A-202), transfers of real property due to a will, inheritance, or through another devise are exempt from the REET. However, transfers of inherited property from an heir to a third party may be subject to the tax.
2. Gift Transfers
A real estate property transfer is considered a gift transfer if the donor does not receive anything from the recipient in return. This type of transfer is exempt from the Real Estate Transfer Tax in Georgia.
3. Transfers Between Spouses
The Washington Administrative Codes (WAC 458-61A-203) outline two cases where property transfers between spouses are exempt from the Real Estate Excise Tax:
- Community property: Transfers of real estate from one spouse or domestic partner to the other are exempt from the REET if the transfer establishes or separates a community property.
- Court decrees: All transfers, conveyances, and assignments of property or interest from one spouse to the other are exempt from the REET if the transfer was executed to fulfill a legal separation, decree of dissolution or declaration of invalidity.
4. Joint Tenancy Transfers
Washington state law (WAC 458-61A-204) exempts specific transfers related to joint tenancies from the REET if they meet one of the following conditions:
- The transfer was executed to create a tenancy in common from a property currently owned in joint tenancy, provided no consideration is included in the transfer.
- The transfer was executed to create a joint tenancy, with or without a right of survivorship, from a property currently owned by a tenancy in common, provided no consideration is included in the transfer.
- The transfer was executed to create a partition of a property owned by joint tenants or tenancy in common, provided no consideration is included in the transfer. The partition is valid only if the parties agree (or are ordered by a court) to assign specific tracts of the property they own jointly.
5. Transfers to Government Entities
State law (WAC 458-61A-205) affirms that transfers of real property from a government entity are exempt from the Real Estate Excise Tax. The law considers the following government entities:
- The federal government
- The government of the state of Washington
- Any departments and institutions of the state of Washington
- Any municipal corporation or political subdivision of the state of Washington
Note that unlike in many other states, voluntary transfers of real property to a government entity are not exempt from the tax, unless they meet other exemptions.
6. Condemnation Proceedings
Per state law (WAC 458-61A-206), real estate property transfers to a government entity are exempt from the Real Estate Excise Tax (REET) if executed in response to an imminent threat to exercise eminent domain. The exception also applies if the seller has a judgment against a government entity or a court-approved settlement under the principle of inverse condemnation.
7. Bankruptcy Transfers
According to state legislation (WAC 458-61A-207), real property transfers from a trustee in bankruptcy or debtor in possession are exempt from REET if they confirm a bankruptcy plan, such as a Chapter 11 plan.
8. Miscellaneous Tax Exempt Transfers
Washington Administrative Codes (WAC 458-61A-208) puts forth that the following transfers are fully exempt from the Real Estate Excise Tax (REET):
- Deeds of trust: Foreclosure sale transfers by the trustee under a deed of trust are exempt from the REET if transferring the property to the beneficiary or a third party.
- Specific court-ordered sales after foreclosure: If a court ordered the sale or transfer of a property due to a mortgage, deed of trust, or lien foreclosure, the transfer is exempt from the REET. Other court-ordered sales are not exempt.
- Sheriff’s sales: Real estate property transfers completed due to the execution of a sheriff’s sale court judgment are exempt from the REET.
- Deeds in lieu of foreclosure: Real property transfers by deed in lieu of foreclosure are exempt under two conditions: if executed to satisfy a mortgage or deed of trust and if no additional consideration is included.
- Contract forfeitures: Real property transfers executed due to a buyer canceling or forfeiting their interest in a real estate contract are exempt from the REET if no additional consideration is included.
- Assignments of indebtedness: Transfers from a servicing agent who has acquired real estate property following foreclosure proceedings or a deed in lieu of foreclosure to the debt’s owner are exempt from the REET.
9. Rescissions of Sale
Per state law (WAC 458-61A-209), reconveyances of real estate property due to rescission of sale are exempt from the Real Estate Excise Tax (REET). The exemption only applies if the property is reconveyed to its original owner.
10. Irrevocable Trust Transfers
In accordance with state legislation (WAC 458-61A-210), two types of transfers involving irrevocable trusts are exempt from the REET:
- Transfers from an irrevocable trust to its beneficiaries if no consideration is given and the distribution adheres to the trust’s provisions
- Transfers to an irrevocable trust, provided the transfer does not result in a change in the beneficial interest.
11. Transfers Due to Corporate Changes in Identity
By state law (WAC 458-61A-211), transfers executed with no changes other than a change in form or identity, with no change in beneficial interest, are generally exempt from the Real Estate Excise Tax.
12. Transfers With No Federally Recognized Gains
According to Washington state law (WAC 458-61A-212), real estate property transfers for the formation, liquidation, dissolutions, or reorganization of an entity are exempt from the REET if they do not involve the recognition of a gain for federal income tax purposes. The relevant Internal Revenue Code (IRC) sections for this exemption are Sections 332, 337, 351, 368(a)(1), 721, and 731.
13. Like-Kind Exchanges
Although purchasing property as an exchange facilitator in connection to an IRC Section 1031 “like-kind” exchange is not exempt from the Real Estate Excise Tax, specific types of subsequent transfers may be exempt if all requirements are met, as listed in the Washington Administrative Codes (WAC 458-61A-213):
- The REET was paid on the initial transfer
- The exchange facilitator must have signed the REET supplement and attached it to the REET affidavit
- The REET supplemental statement must contain a statement attesting the exchange facilitator originally obtained the property’s title to facilitate a Section 1031 exchange
- The exchange facilitator used funds provided by a grantee to acquire the property or received them from the sale of the initial property
14. Nominee Transfers
Per state law (WAC 458-61A-214), real property transfers by a nominee to a third-party purchaser may be exempt from the Real Estate Excise Tax if:
- The REET was paid on the initial transfer
- The nominee used funds provided by the third-party purchaser to acquire the property
- An agreement between the nominee and the third-party purchasers existed at the time of the initial purchase
- The subsequent transfer from the nominee to the third-party purchaser includes no additional consideration
15. Clearing or Exiting Titles
Under state legislation (WAC 458-61A-215), quitclaim deeds issued exclusively to clear titles are exempt from the REET if no consideration passes. Real property transfers executed solely to add or remove a co-signor are also exempt if no consideration is given and if done as a requirement by a lender to qualify for a mortgage.
16. Low-Income Housing Transfers
If a real estate property qualifies as low-income housing under Washington law (WAC 458-61A-218), transfers of this property are exempt from the Real Estate Excise Tax.
17. Transfers Involving Developmentally Disabled Individuals
Real estate property transfers may be exempt from the Real Estate Excise Tax if the conditions outlined in WAC 458-61A-219 are met:
- The transfer is from the legal representative of an individual with a developmental disability to a qualified entity
- The grantor’s adult child or legal representative retains a life estate in the property
- The grantor’s adult child or legal representative is allowed to reside in the property, if safe and appropriate
- The transfer includes no consideration
- The property has no more than four living units
- The property remains in continued use as supported living for individuals with developmental disabilities for at least 50 years
18. Self-Help Housing Transfers
According to the Revised Code of Washington (RCW 82.45.010(3)(u)), transfers of property designated as self-help housing may be exempt from the REET if the transfer is from an affordable homeownership facilitator to a low-income household.
19. Affordable Housing Transfers
In accordance with the Revised Code of Washington (RCW 82.45.010(3)(v)(i)), transfers of real estate property to a qualifying grantee are exempt from the REET if the grantee uses the property for housing low-income individuals.
Washington Real Estate Taxes vs. Other States
Real estate taxation in the state of Washington differs from most other states, partly due to the lack of a real estate capital gains tax. Below is a breakdown of how Washington’s taxes compare to similar states.
Virginia
Virginia’s real estate taxation schedule is near the national average.
Capital Gains Tax Rate: 2% – 5.75%
Virginia treats capital gains realized in the state as individual income. According to the Virginia Department of Taxation, four tax brackets apply:
- If the total Virginia taxable income is $3,000 or less, the state income tax is 2%.
- If the total Virginia taxable income is over $3,000 but $5,000 or less, the state income tax is $60 + 3% of the excess over $3,000.
- If the total Virginia taxable income is over $5,000 but $17,000 or less, the state income tax is $120 + 5% of the excess over $5,000.
- If the total Virginia taxable income is over $17,000, the state income tax is $720 + 5.75% of the excess over $17,000.
Transfer Tax Rate: 0.25%
Virginia levies the State Recordation Tax on all property transfers within the Commonwealth, except as exempted by law. According to the Code of Virginia, the State Recordation Tax is $0.25 for every $100 or a fraction thereof in the consideration amount (VA Code 58.1-801).
Arizona
Arizona’s real estate taxes are lower than the national average, partly due to the lack of real estate transfer taxes.
Capital Gains Tax Rate: 2.55% – 2.98% for Tax Year 2022, flat 2.5% rate for Tax Year 2023
The Arizona Department of Revenue (ADOR) treats capital gains as gross income, subjecting them to the state’s standard income tax schedule.
For Tax Year 2022, Arizona used a two-tiered tax schedule: 2.55% and 2.98%. Per the 2022 version of Form 140, the income tax rates were as follows:
- Taxpayers filing as single or married filing separately, with an annual income of $28,653 or less: 2.55%
- Taxpayers filing as single or married filing separately, with an annual income of $28,654 or more: 2.98% of every dollar above the first $28,653 plus $731.
- Taxpayers filing as head of household or married filing jointly, with an annual income of $57,305 or less: 2.55%
- Taxpayers filing as head of household or married filing jointly, with an annual income of $57,306 or more: 2.98% of every dollar above the first $57,306 plus $1,461.
For Tax Year 2023, Arizona will switch to a flat tax rate of 2.5%.
Transfer Tax Rate: 0%
Arizona is one of the few states not to levy an actual real estate transfer tax since the adoption of Proposition 100, better known as the Protect Our Homes Initiative, which banned real estate transfer taxes. This proposition was approved in November 2008 and signed into law in January 2009.
Tennessee
The Volunteer State is one of the most affordable states for selling real estate property.
Capital Gains Tax Rate: 0%
Tennessee does not levy capital gains taxes, nor does it treat capital gains as income.
Transfer Tax Rate: 0.37%
The Tennessee Department of Revenue imposes two Recordation Taxes, one of which is the Realty Transfer Tax. Page 3 of the Recordation Tax Manual states the Realty Transfer Tax is $0.37 per $100 or fraction thereof in the property’s consideration. This tax corresponds to a rate of 0.37%.
When Do You Pay Capital Gains Tax on Washington Real Estate?
The state of Washington does not tax capital gains realized on the sale of real estate property.
Short-Term vs. Long-Term Capital Gains Tax Rate in Washington
Because the state of Washington exempts capital gains realized from real estate sales, there is no distinction between short-term and long-term capital gains.
How to Avoid Capital Gains Taxes on Home Sale in Washington
While the state of Washington does not tax capital gains realized on the sale of a home, apartment, or condo in the Evergreen State, you may still use strategies to limit or avoid paying the federal capital gains tax.
Strategy #1: Federal Exclusion of Long-Term Capital Gains
According to the IRS, you can exclude up to $250,000 (or $500,000 if married and filing jointly) of the gains realized from the sale of a home, provided the home was your primary residence. You can prove your home was a primary residence by passing the ownership and use tests, which require you to pass the following:
- Ownership test: You have owned the home for at least two years before the sale. Documents such as a deed and title insurance may constitute valid proofs of ownership.
- Use test: You must show proof of occupancy, meaning you have lived in the home and used it as your primary residence for at least two years before the sale. Documents used to prove occupancy are outlined in federal proof of occupancy guidelines.
Although it is not required for the ownership and usage periods to be consecutive, you must be able to prove both ownership and use of the home within five years of the sale. Additionally, you must not have used this exclusion for another home in the last two years.
Example: Harold and Grace are a married couple living in Tacoma, WA. Harold and Grace’s filing status is married and filing separately, and Harold’s annual income is $144,000. Harold purchased an apartment in Tacoma six years ago, using it as his primary residence from one day after the date of purchase until he sold it for $208,000, realizing a long-term capital gain of $64,000.
Harold qualifies for the federal exclusion of long-term capital gains because he passes the IRS’s ownership and use tests, having owned and used the apartment for more than two years before the sale. As a married taxpayer filing separately, he can exclude up to $250,000 of his capital gains from the federal capital gains tax. Because he realized only $64,000, Harold can exclude 100% of his gains from federal taxation. This exclusion allows him to avoid paying any capital gains or income taxes on the sale of his home.
How to Report Your Property Sale for Taxes in Washington
If you have sold a property in the Evergreen State, you must report the sale using the correct forms.
IRS Forms
You must report the sale of your New Jersey home to the IRS. To do so, you must complete and submit two forms: IRS Schedule D (Form 1040) and IRS Form 8949.
Form 8949 requires you to report whether your gains are long-term or short-term. Short-term gains must be listed under Part I, whereas long-term gains must be listed in Part II. If you can exclude the gains you’ve realized with a specific property, enter the letter code “H” in column (f) on the line corresponding to that property, then write the corresponding adjustment amount in parentheses and as a negative in column (g).
After completing Form 8949, enter the corresponding information regarding short-term and long-term gains in IRS Schedule D (Form 1040). Part I lets you enter short-term gains, whereas Part II is for long-term gains.
Washington Department of Revenue Tax Forms
The State of Washington does not levy individual or corporate income taxes. Consequently, there are no corresponding forms or requirements to report your real estate property sales to the state.
The Frequently Asked Questions section on the WA-DOR website states that you are not required to file a state-level capital gains tax return if you don’t owe any capital gains to the state or your taxable capital gains are long-term and exempt or under the standard deduction of $250,000. You only need to file a federal income tax return.
FAQs
Here are the answers to some common questions about capital gains taxes in Washington when selling a residence.
You can defer paying capital gains taxes by reinvesting the sale proceeds through a qualifying like-kind 1031 exchange to purchase a similar property. Once that property is sold, you must pay taxes on the cumulative profit.
Washington state law (RCW 84.04.090) states that real property includes land, exempting it from the state’s capital gains tax. Only the federal capital gains tax applies.
No, this exemption refers to a rule repealed in 1997 in favor of one that impacts all individuals regardless of age. Washington state does not have residents pay capital gains taxes on the sale of real estate, but some individuals may receive exemptions for other taxes based on age. Consult with a tax professional for help when filing your annual taxes.
While the state of Washington levies a capital gains tax, real estate is specifically exempted. When selling property in Washington, you can expect to pay only the federal capital gains tax.
Washington State residents only need to pay federal capital gains taxes on the sale of a home. The capital gains realized are added to your federal Adjusted Gross Income (AGI) after reporting the sale through your IRS Schedule D (Form 1040).
No. According to the IRS, all capital gains are taxable. However, specific types of capital losses are deductible, such as losses realized on business and investment property. You cannot deduct losses realized on personal-use property.
No, Washington state capital gains tax does not apply to the sale of real estate.
No. If you lose money on the sale of a home, you realize a capital loss. Washington State does not tax capital gains or losses.
Washington State does not impose its capital gains tax on the sale of real estate. At the federal level, you may only benefit from the IRC Section 121 exemption if you realized a long-term capital gain and used the home as a primary residence for at least two of the last five years before the sale.
The state’s exemption of real estate capital gains from the capital gains tax applies regardless of the homeowner’s age.
