Selling your home in Washington can be an exciting but complex process, especially when it comes to understanding the tax implications. One of the most important financial considerations for sellers is the capital gains tax. Whether you’re a long-time homeowner or selling an investment property, knowing how capital gains tax works can help you maximize your profits and avoid unexpected costs.
What Is Capital Gains Tax?
Capital gains tax is a federal and state tax applied to the profit you make when selling a property. The capital gain is the difference between your selling price and your adjusted basis, which typically includes your original purchase price, plus the cost of major improvements and certain selling expenses.
Capital Gains Tax Exemptions for Homeowners
The good news is that many homeowners may qualify for an exclusion from capital gains tax under the IRS Section 121 Exclusion. This allows homeowners to exclude up to:
– $250,000 of capital gains if filing as an individual
– $500,000 of capital gains if filing as a married couple
To qualify for this exemption, you must:
– Have owned the home for at least two years
– Have lived in the home as your primary residence for at least two of the last five years before selling
– Not have claimed the exemption on another home sale in the past two years
Capital Gains Tax Rates in Washington
Washington does not impose a state-level capital gains tax on real estate sales. However, you are still subject to federal capital gains tax, which is calculated based on your income:
– 0% if your taxable income is below $44,625 (single) / $89,250 (married)
– 15% if your taxable income is between $44,626-$492,300 (single) / $89,251-$553,850 (married)
– 20% if your taxable income exceeds $492,300 (single) / $553,850 (married)
How to Reduce or Avoid Capital Gains Tax
If you don’t qualify for the IRS exemption, there are still ways to minimize capital gains tax, including:
– Increasing Your Cost Basis: Keep records of home improvements, renovations, and closing costs to deduct from your taxable gain.
– 1031 Exchange (For Investment Properties): If selling an investment property, you may defer capital gains tax by reinvesting the proceeds into a similar property.
– Sell Over Time: If you own multiple properties, staggering sales over different tax years can help you stay in a lower tax bracket.
– Convert to a Primary Residence: If your property was a rental, living in it for two years before selling could make you eligible for the IRS exclusion.
Final Thoughts
Understanding capital gains tax before selling your home in Washington can save you thousands of dollars. Whether you qualify for an exemption or need strategies to minimize taxes, proper planning is key.
Thinking about selling your home? Contact us today for expert guidance and a free home value analysis!