Editor's note: This article has been updated for 2023's most current information.
If you are in the process of – or thinking about – selling your home in Washington State, the closing stages may not be upfront in your mind. Eventually you will have to tackle the most dreaded part of money exchanging hands – taxes.
As you may know, Washington State doesn’t tax income the way most other states do so taxing your income in this way may be new to you. But don’t worry, this is everything you need to know about capital gains tax for real estate in Washington.
In Washington we are subject to capital gains tax on the sale of certain assets over $250,000 (or $500,000 for married couples filing jointly). Real estate falls squarely in this category. If you have held a property for longer than a year, you will be required to pay the capital gains tax. This rate is 7% as of 2023. For individuals with a taxable income below this threshold, the capital gains tax rate is 0%.
Keep in mind that the Capital Gains Tax is on profit made from the sale of an asset (not necessarily just property). This is not to be confused with another tax you will have to pay – the Real Estate Excise Tax (REET). REET that is levied on the sale of real estate property in the state of Washington. The REET rate in Washington state ranges from 1.1% to 3.0% of the sales price of the property. The exact rate depends on the sales price of the property and is determined by the county in which the property is located. For example, if you are selling a home in King County in Washington state for $525,000, the REET may be around 1.6% or $8,400. It is important to be aware of the REET and to budget for it when selling a home in the state. Calculate the estimated Real Estate Excise Tax for your home using our helpful REET calculator.
Also, there are certain exemptions and deductions may apply to the REET, such as exemptions for affordable housing and transfers between family members. Speak to a tax professional to see if you qualify for any exemptions or deductions.
In short – yes, the Washington excise tax is in effect. This tax was facing a legal battle as Washington State Superior Court Judge Brian Huber struck down the tax as unconstitutional. The Washington State Supreme Court upheld the constitutionality of the state's capital gains tax in a 7-2 decision on March 24, 2023. The court found that the tax is an excise tax, not an income tax, and is therefore not subject to the state's one-percent property tax limit. The tax went into effect on January 1, 2022, and applies to long-term capital gains of more than $250,000 per person, $500,000 for married couples filing jointly.
If you owe capital gains tax, you are required to file a capital gains tax return along with a copy of your federal tax return. The return is due at the same time as your federal income tax return – even if you have an extension. This does not extent the due date for the payment, though. Late fees and penalties will apply to late payments.
Almost always the seller is responsible for the capital gains tax. In some cases the buyer may choose to pay the capital gains tax if it makes sense for the deal. If you specifically want this negotiated in the deal, make sure to discuss that early on. The buyer may be responsible for withholding a portion of the sale proceeds to cover the seller's potential tax liability if the seller is a nonresident of Washington State. The exact withholding rate and requirements vary depending on the seller's residency status and other factors, and sellers should consult with a tax professional to determine their specific obligations.
This is not meant to be legal advice and if you have any questions, reach out to the Department of Revenue directly.
We buy homes quickly in the Seattle area in Washington State (see a full list of where we buy homes here). Selling your home can be overwhelming and we take the stress out of the process by purchasing homes in any condition within as few as 7 days. No cleaning, no repairs, and no showings. Let us help you navigate it all. We can also help guide you through all of the tax issues and provide you with the necessary resources.
RSM US. (2023, March 24). Washington Supreme Court upholds capital gains tax. https://rsmus.com/insights/tax-alerts/2023/Washington-Supreme-Court-upholds-capital-gains-tax.html
Department of Revenue. (2023). Capital Gains Tax. Washington State. https://dor.wa.gov/taxes-rates/other-taxes/capital-gains-tax
Department of Revenue. (2023). Real Estate Excise Tax (REET). Washington State. https://dor.wa.gov/taxes-rates/other-taxes/real-estate-excise-tax
Washington State Legislature. (2021). Chapter 5, Laws of 2021. https://lawfilesext.leg.wa.gov/biennium/2021-22/Pdf/Bills/Senate%20Passed%20Legislature/5096-S.PL.pdf
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