Do You Pay Capital Gains Tax When Selling an Inherited House in Washington?
If you inherited a home in Washington and are considering selling it, you may be worried that a large portion of the proceeds will disappear to capital gains taxes. Fortunately, the answer is often more favorable than families initially expect, although it depends on the numbers.
Washington State’s capital gains tax does not apply to the sale of real estate. However, federal capital gains tax on inherited property may still apply if the property is sold for more than its adjusted tax basis.
This article is part of our Inherited Property Taxes and Financial Issues in Washington State guide . For the broader estate home process, see our complete guide to selling a parent’s home after death in Washington .
Washington Capital Gains Tax vs. Federal Capital Gains Tax
Washington State
Washington’s capital gains tax does not apply to the sale or exchange of real estate.
Federal Taxes
Federal tax rules are different. If inherited property is sold for more than its adjusted basis, there may be a taxable capital gain that needs to be reported on the federal income tax return.
Why Step-Up in Basis Can Reduce the Taxable Gain
Inherited property generally receives a tax basis tied to its fair market value at the owner’s date of death, subject to exceptions and alternative valuation rules.
For example, suppose your parent originally purchased a Seattle home for $200,000. At the time of death, its fair market value is $800,000. If the applicable inherited basis is $800,000 and the home later sells for $825,000, you generally would not calculate the gain from your parent’s original $200,000 purchase price.
Later sale price: $825,000
Difference before other applicable adjustments: $25,000
This is a simplified example. Improvements, selling expenses, depreciation, estate-tax valuation rules, and other adjustments can change the actual calculation.
If you want to understand this concept first, read What Is Step-Up in Basis for Inherited Property?
Capital Gains Tax Is Not the Same as Washington REET
There is another Washington tax that is easy to confuse with capital gains tax: Real Estate Excise Tax, or REET.
Washington generally imposes REET when real property is sold, unless a specific exemption applies. So saying that real estate is exempt from Washington’s capital gains tax does not mean there are no Washington taxes or transaction costs associated with selling the property.
You can review current guidance through the Washington Department of Revenue’s Real Estate Excise Tax information .
What If You Sell the Inherited House Quickly?
Federal tax law generally treats a gain or loss from inherited property that is a capital asset as long-term, regardless of how long you personally owned the property.
Capital Gains Tax on Inherited Property FAQs
Does Washington charge capital gains tax when I sell an inherited house?
Washington’s capital gains tax does not apply to the sale or exchange of real estate. Federal capital gains tax rules may still apply.
Do I pay federal capital gains tax on the entire sale price?
No. Federal capital gain is not simply the home’s entire sale price. The calculation generally considers the sale proceeds and the property’s adjusted tax basis, along with applicable adjustments and expenses.
What is the basis of an inherited house?
The basis of inherited property is generally its fair market value at the owner’s date of death, although alternative valuation and other exceptions can apply.
Is inherited property automatically tax-free when sold?
No. A stepped-up basis may reduce the taxable gain substantially in some situations, but it does not automatically make every inherited-property sale tax-free.
Know Your Numbers Before Deciding to Sell
Understanding the potential capital gains tax on inherited property can help you compare your options, but taxes are only one part of the decision. Current market value, carrying costs, property condition, and your family’s goals matter too.
Emily Cressey, Seattle Realtor with HomePro Associates at Keller Williams Greater Seattle, can help you evaluate the property’s current market value and selling options. Talk through your inherited property and timeline with Emily.