What Kind of Taxes Hit When You Sell a House?

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Selling a home can trigger multiple taxes, depending on your circumstances. Below is a narrative breakdown of what to expect — and how recent Washington state law may or may not affect you.

Quick note: We’re not tax advisors or attorneys. This post is based on what we’ve seen our clients experience in real-world sales—and we’re sharing it to highlight how complex these situations can be. Everyone’s tax picture is different, and it’s always a good idea to talk with a licensed CPA or tax professional before making any decisions.

1. Federal Capital Gains Tax: How Much and When

When you sell a property for more than your adjusted cost basis (what you paid + improvements – depreciation, etc.), that profit (gain) can be taxed federally. But there are favorable rules if the property was your primary residence:

• You may exclude up to $250,000 of gain if you’re single, or $500,000 if married filing jointly — if you’ve owned and lived in the home for at least 2 of the last 5 years.
• You also haven’t used the exclusion on another home in the prior 2 years.

If you don’t qualify (for example, the home was a rental, or you lived there less than 2 years), then your gain is more likely to be taxable.

Federal long-term capital gains rates (for assets held more than one year) in 2025 are generally 0%, 15%, or 20%, depending on your taxable income.
Short‑term gains (assets held one year or less) are taxed at ordinary income rates.

Also: if your income is high, the Net Investment Income Tax (NIIT) of 3.8% may apply to your capital gain.

Bottom line: the federal slice often dominates the tax burden unless special circumstances apply.

2. Depreciation Recapture (For Rentals or Investment Properties)

If the home was ever used as a rental or investment and you claimed depreciation deductions, you’ll likely owe “recapture” on that depreciation. That portion is taxed as ordinary income, up to a 25% rate in many cases.

This is one place people are surprised: even if your total gain qualifies for favorable capital gains treatment, depreciation recapture is a separate calculation and doesn’t get excluded under the primary residence rules.

3. Washington State: Real Estate Excise Tax (REET)

If your property is in Washington, you’ll pay the Real Estate Excise Tax (REET). This tax is based on the sale price, not the gain.

Key points:

• It’s collected at closing (often withheld from your proceeds).
• The rate is graduated (i.e. different brackets) and includes local add-ons.
• In many counties, a mid‑price home might face ~1.6% to ~1.78% (or more) total when you combine state + local rates.

So, REET is a cost you must budget for, determined by sale price and local jurisdiction.

4. Washington’s Capital Gains Tax (New in 2022, Updated in 2025)

This is where “what state you’re in” really changes things, but in a way that may surprise many home sellers: Washington’s capital gains tax does not apply to real estate sales.

Let me explain:

• In 2021, Washington passed ESSB 5096, establishing a 7% capital gains tax on certain long-term gains (e.g. stocks, business interests) when they exceed a state exemption.
• But the law explicitly exempts real estate from that tax.
• Thus, when you sell a house (or real property), you don’t pay Washington’s capital gains tax on that gain.

However, Washington’s capital gains law has seen changes effective January 1, 2025:

• The first $1 million of taxable gains (after the state’s standard deduction) remain taxed at 7%.
• Gains exceeding $1 million are now taxed at 9.9% (i.e. the 7% base plus an additional 2.9% surcharge)
• A standard deduction applies (in 2024 it was ~$270,000, indexed for inflation). You don’t pay the tax until gains exceed that.

But again: none of this affects real estate sales, because real property is exempt.

So for your home sale in Washington: you do not owe this state-level capital gains tax on the gain from the property itself. Your tax exposure from Washington is generally limited to REET.

5. Deductions and Offsets You Can Use

These reduce your taxable gain (federal side) and thus your tax liability:

• Major capital improvements (not routine repairs) — e.g. adding a room, new roof, structural upgrades
• Selling costs: agent commissions, escrow, title, closing adjustments
• Legal or staging costs directly tied to the sale
• If you had a period of rental use, careful tracking of basis and depreciation is key

These items shift your basis upward, shrinking your gain (or in some cases, eliminating it).

6. Special Situations — Time to Call in a Pro

Some scenarios complicate the math:

• You converted your residence into a rental or vice versa
• You inherited the property or received it as a gift
• You’re doing a 1031 exchange (for investment property)
• You own multi‑unit dwellings or mixed-use
• Out-of-state ownership or income allocation issues

A CPA or real estate tax specialist should help you model your specific situation optimally.

Putting It All Together: What You Might Pay

• In the best case (you qualify for the full exclusion, you lived there 2 out of the last 5 years), your federal capital gains tax might be zero.
• But you will pay REET at closing in Washington, sometimes a few percent depending on the sale price and local add-ons.
• You won’t pay Washington’s capital gains tax on your home sale because that law excludes real estate.
• If you don’t qualify for the exclusion (or had rental use), your federal gain might be taxed at 15% or 20% (plus NIIT or recapture) depending on your income.
• Add to that state withholding or taxes if you sell property outside Washington.

Recap Q&A

Q: Does Washington now have a "capital gains tax" on home sales?
A: No. Washington’s capital gains tax (first effective in 2022) explicitly exempts real estate, so gains from selling a home are not subject to that tax.

Q: What recent changes were made to Washington’s capital gains tax in 2025?
A: Starting Jan. 1, 2025, the tax is tiered: the first $1M of taxable gains pay 7%, and gains above $1M pay 9.9%.

Q: Who pays the Washington capital gains tax?
A: Individuals (or pass-through owners). The law does not apply to C-corporations or to real estate gains.

Q: How much is REET in Washington?
A: It’s a graduated tax on the sale price, not the gain. Depending on county/local additions, rates for typical homes often land in the range of ~1.1% to ~3%. (For a $500,000 home, you might see ~1.6–1.78% in many localities.)

Q: How do I minimize the tax on a home sale?
A: Meet the 2-out-of-5-year rule, maximize basis through improvements & closing costs, avoid or carefully plan depreciation recapture, and engage a tax advisor for more complex scenarios.