Seller Advice • Greater Seattle
If You’ve Owned Your Seattle-Area Home For Twenty Or Thirty Years, You May Be Sitting On A Substantial Amount Of Equity. But How Much Of That Profit Will You Actually Keep When You Sell?
If you qualify for the federal home sale exclusion, you may exclude up to $250,000 of gain as an individual or $500,000 as a married couple filing jointly. You generally must satisfy the ownership, residence, and prior-sale requirements. Any remaining gain may be subject to federal capital gains tax and, in some cases, the 3.8% Net Investment Income Tax. Washington’s separate capital gains tax does not apply to real estate. The key is calculating your adjusted cost basis and eligible selling expenses before estimating what you owe.
You bought your house in the Seattle area back when a nice home cost about what a new car costs today. You raised a family in it, replaced the roof twice, finished the basement, and watched the whole region fill in around you.
Now you’re thinking about selling, and someone at a dinner party mentions capital gains tax. Suddenly, you’re wondering whether the IRS is about to take a substantial bite out of your biggest asset.
Here’s the part many homeowners misunderstand: capital gains tax does not apply to your entire sale price. And if you qualify for the home sale exclusion, not all of your profit is taxable either.
There is a substantial tax-free exclusion built into federal law. But for homeowners who purchased decades ago, the property’s appreciation may be large enough to exceed that exclusion.
There is also a less familiar federal tax that can affect some higher-income sellers. That’s why understanding your real numbers before listing can make such a difference.
My Recommendation: Before you decide when to sell, find out what your home is worth, calculate your adjusted basis, and speak with your tax professional. The goal is to understand what you’ll actually keep, not just what your home might sell for.
Understanding The Home Sale Exclusion
The Tax-Free Cushion (And Why Long-Time Seattle Owners Blow Past It)
The IRS gives qualifying homeowners a tax benefit called the home sale exclusion. If you have owned and lived in the property as your primary residence for at least two of the five years before the sale, you may qualify to exclude part of your gain.
A qualifying individual can exclude up to $250,000, while an eligible married couple filing jointly can exclude up to $500,000. Additional requirements apply, including rules about previous home sales. Read the full requirements in IRS Publication 523 .
For homeowners who purchased in Shoreline, Edmonds, Kirkland, or elsewhere in Greater Seattle decades ago, appreciation may be large enough to exceed even the $500,000 exclusion.
Here is the challenge for long-time homeowners: the federal home sale exclusion amounts have not increased since they were introduced in 1997.
Home values have changed substantially since then, especially in desirable Greater Seattle neighborhoods. Someone who bought a home twenty or thirty years ago may have accumulated far more appreciation than the original exclusion was designed to shelter.
Let’s use a hypothetical example to see how that might look.
What Happens When The Gain Exceeds The Exclusion?
These figures are for illustration only and do not represent a specific home or current market valuation.
| Item | Example Amount |
|---|---|
| Original Purchase Price | $300,000 |
| Sale Price Today | $1,350,000 |
| Preliminary Gain Before Adjustments And Selling Costs | $1,050,000 |
| Married-Couple Home Sale Exclusion | −$500,000 |
| Preliminary Gain Above The Exclusion | $550,000 |
This is not the final taxable gain. The example deliberately excludes eligible capital improvements, selling expenses, and other potential basis adjustments. It assumes the couple qualifies for the full $500,000 exclusion.
At first glance, that married couple appears to have $550,000 of gain above the federal exclusion. That could translate into a substantial federal capital gains tax bill.
But before drawing conclusions, there is one important calculation we haven’t completed yet.
The Important Part: The original purchase price is not necessarily the home’s final adjusted tax basis. Improvements and eligible selling costs may significantly reduce the taxable gain. That’s what we’ll examine next.
Understanding Your Adjusted Cost Basis
Your Basis Is The Whole Ballgame
Capital gain is not simply the sale price minus what you originally paid. The calculation also takes into account your adjusted cost basis and eligible selling expenses.
This is where longtime Seattle homeowners can make a substantial difference in their tax bill. The IRS explains the rules in Publication 551, Basis Of Assets , but let’s break them down in plain English.
Improvements Can Increase Your Tax Basis
Your basis generally starts with what you paid for the home, along with qualifying acquisition costs. You then adjust that amount for certain expenses and events during ownership.
Qualifying capital improvements generally add value, prolong the property’s useful life, or adapt it to new uses. Their costs can increase your adjusted basis and reduce the gain when you sell.
Think about the major work you’ve completed over twenty or thirty years. A new roof, a remodeled kitchen, a finished basement, or an addition may all represent qualifying improvements.
Routine repairs and normal maintenance generally do not increase basis, although certain repairs performed as part of a larger improvement project may qualify.
Selling Costs Also Reduce Your Gain
Eligible expenses associated with selling the home generally reduce the amount realized from the transaction.
These may include real estate commissions, Washington’s Real Estate Excise Tax (REET), qualifying title and escrow fees, and other allowable selling expenses.
Not every closing cost is treated the same way, so have your CPA review the final settlement statement.
Now let’s return to the same hypothetical Seattle home sale from Section 2.
The Same Home Sale, With The Full Calculation
Here’s what happens when we include eligible selling costs and capital improvements.
Hypothetical Example
| Calculation | Example Amount |
|---|---|
| Sale Price | $1,350,000 |
| Less Eligible Selling Costs (Commission, REET, Escrow) | −$95,000 |
| Amount Realized | $1,255,000 |
| Original Purchase Price | $300,000 |
| Plus Qualifying Capital Improvements | +$220,000 |
| Adjusted Basis | $520,000 |
| Total Gain | $735,000 |
| Less Married-Couple Home Sale Exclusion | −$500,000 |
| Potentially Taxable Gain | $235,000 |
This simplified calculation assumes the married couple qualifies for the full $500,000 exclusion, the improvements and selling costs are eligible, and no additional basis adjustments or special tax rules apply.
Preliminary gain above the married-couple exclusion.
Potentially taxable gain after accounting for the $220,000 in improvements and $95,000 in selling costs.
That’s a $315,000 reduction in potentially taxable gain simply from properly accounting for qualifying improvements and selling expenses.
At illustrative federal capital gains rates of 15% to 20%, that difference could represent approximately $47,250 to $63,000 in federal capital gains tax , before considering other taxes or individual circumstances.
The key point is that those improvements and expenses were already there. The homeowner just needs to document them and calculate the gain correctly.
Start Gathering Your Records Before You List
Look for contractor invoices, remodeling receipts, building permits, closing statements, and records of major work completed over the years.
If you can’t find every receipt, don’t assume the improvement must be ignored. Permits from your city or county, contractor records, and before-and-after photographs may help support your records.
Have your CPA determine what documentation is sufficient for your specific tax return.
For a longtime homeowner in Shoreline, Edmonds, Kirkland, Bothell, or elsewhere in Greater Seattle, the difference between original purchase price and adjusted basis can be substantial.
The goal is not to stretch the numbers. It’s to make sure every legitimate improvement and allowable selling expense is included.
Your home may have a much higher adjusted basis than you realize. Understanding that number before listing gives you a clearer picture of what you may actually keep from the sale.
Understanding The Taxes On Your Home Sale
The Rate, The Surtax, And The Washington Myth
Once you know your potentially taxable gain, the next question is how much tax you might owe.
There are three things worth understanding: the federal capital gains tax rate, a possible additional 3.8% federal surtax, and the difference between Washington’s capital gains tax and its real estate excise tax.
Your Federal Capital Gains Rate Depends On Your Income
If you have owned your home for more than one year, a taxable gain from the sale generally receives long-term capital gains treatment.
Depending on your taxable income and filing status, most long-term capital gains are taxed at 0%, 15%, or 20%.
For many sellers, the 15% rate is relevant, while higher-income households may pay 20% on some of their gain. Certain special tax rules, including depreciation-related gain, can affect the rate.
Federal capital gains income thresholds change over time, so your CPA should calculate the rate using the rules for your actual sale year.
Learn more in IRS Topic 409, Capital Gains And Losses .
Rates apply according to federal taxable-income brackets. Different portions of a gain may fall into different brackets.
The Net Investment Income Tax Can Catch Sellers By Surprise
There is another federal tax that some longtime homeowners overlook. It is called the Net Investment Income Tax, or NIIT .
This additional 3.8% tax may apply to taxable investment income, including the portion of a home-sale gain that is not excluded under the federal primary residence rules.
The NIIT becomes relevant when your modified adjusted gross income exceeds certain thresholds.
Here’s what makes this particularly important for a longtime homeowner: a large taxable gain in the year you sell can increase your adjusted gross income enough to cross the NIIT threshold, even if your usual income is lower.
The tax is calculated on the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds the applicable threshold. This means it does not necessarily apply to your entire taxable home-sale gain.
For example, if the entire $235,000 taxable gain from our earlier illustration were subject to NIIT, the additional tax would be $8,930. Your actual amount could be lower or zero.
Review the IRS Net Investment Income Tax Guidance for details.
No Washington Capital Gains Tax On Real Estate Sales
Washington’s Capital Gains Tax Does Not Apply To Your Home Sale
This is one of the biggest misconceptions I hear about selling real estate in Washington.
Washington has a separate capital gains tax, but the sale or exchange of real estate is specifically exempt.
The exemption applies to residential and commercial real estate, regardless of how long the seller owned it or whether the property was a primary residence.
That includes ordinary sales of houses, condos, investment properties, and vacant land.
You can verify this directly with the Washington Department Of Revenue and RCW 82.87.050 .
But You Still Need To Budget For REET
Washington’s Real Estate Excise Tax (REET) is a separate tax that generally applies when real property is sold.
REET is normally paid by the seller at closing and is based on the selling price rather than the amount of profit. State and local REET rates apply.
Your escrow company can calculate the applicable amount based on the property and closing date. See the Washington REET Guidance .
So when you sell a longtime home in Seattle, Shoreline, Edmonds, Kirkland, Bothell, or elsewhere in Greater Seattle, there are several separate numbers to understand.
Your federal capital gains tax depends on the taxable gain, your filing status, and your income. The additional 3.8% federal surtax may apply if your income crosses the relevant threshold.
Washington’s separate capital gains tax does not apply to the real estate sale, but REET generally remains an ordinary seller closing cost.
The best time to calculate these numbers is before you list, not after you close.
Your Pre-Sale Planning Checklist
How To Shrink The Tax Bill Before You Sell
The best time to plan for capital gains is before your home goes on the market. Here are four steps worth taking.
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Build Your Basis
Gather receipts, permits, and records for major improvements. Ask your CPA which costs can legitimately increase your adjusted basis.
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Confirm Your Exclusion
Review the ownership, residence, and filing-status rules. Special provisions may apply if you’ve recently lost a spouse or used the property for business or rental purposes.
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Consider The Timing
Your income in the sale year can affect your federal capital gains rate and the 3.8% surtax. Have your CPA evaluate the timing before you commit to selling.
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Know Your Net Proceeds
Get an accurate market valuation and estimated selling costs. Buying a smaller primary home does not automatically defer the gain on your current one.
Common Seller Questions
Frequently Asked Questions
Do I Pay Capital Gains Tax On The Full Sale Price Of My Seattle Home?
No. Capital gains tax is based on your taxable gain, not the entire selling price. Eligible selling costs, your adjusted basis, and any qualifying home sale exclusion can reduce the amount subject to tax.
Does Washington’s Capital Gains Tax Apply When I Sell My House?
No. Washington’s capital gains tax exempts real estate. However, federal capital gains tax may apply, and Washington’s separate Real Estate Excise Tax (REET) generally applies to the sale.
What Home Improvements Can Increase My Tax Basis?
Qualifying improvements may include additions, a kitchen remodel, roof replacement, new windows, or a finished basement. Routine maintenance generally does not qualify. Keep supporting records and have your CPA review the expenses.
What Is The Additional 3.8% Net Investment Income Tax?
It’s a federal surtax that can apply to taxable investment income, including certain home-sale gains. It generally depends on your modified adjusted gross income and the applicable filing-status threshold.
Can I Still Get The $500,000 Exclusion If I’m Recently Widowed?
Possibly. Eligible surviving spouses may claim the larger exclusion when selling within two years of a spouse’s death, provided the relevant requirements are satisfied. Washington community property rules may also affect the home’s adjusted basis. Ask your CPA about your specific situation.
The Bottom Line
Know What You’ll Keep Before You List
Capital gains on a longtime Seattle home can be significant, but the tax bill is often much smaller than a simple sale-price-minus- purchase-price calculation suggests.
Build your basis, understand the exclusions, and coordinate with your CPA before selling. A good real estate plan should account for both your sale price and your estimated net proceeds.
Thinking About Selling Your Longtime Seattle-Area Home?
I can help you understand your home’s current market value, estimate selling costs, and prepare a thoughtful sales plan. Your CPA can then evaluate the tax consequences using those numbers.
Whether you’re downsizing, relocating, or simply exploring your options, there’s no pressure to make a decision before you’re ready.
This article provides general real estate education and is not individualized tax, legal, or financial advice. Tax treatment depends on your circumstances and the applicable law. Consult a qualified tax professional before making decisions.