When you sell a home in Washington State, you can expect to pay some sizable transfer taxes.The main thing to consider is the state’s real estate excise tax (REET). Aside from that, there are lesser local transfer taxes, as well as the standard federal tax on capital gains you make from the home sale.
What is Washington’s real estate excise tax?
This is the primary tax you’ll have to pay when you sell your Washington home. It’s based on the entire sales price (not just the profit), and the percentage you owe graduates as the sales price reaches specific thresholds.
Effective Jan. 1, 2023, the selling price thresholds for the state portion of REET will be as follows:
For the portion of the selling price that is:
Real Estate Excise Tax Rate
Less than or equal to $525,000
1.1%
Greater than $525,000 and less than or equal to $1,525,000
1.28%
Greater than $1,525,000 and less than or equal to $3,025,000
2.75%
Greater than $3,025,000
3.0%
Most counties and local governments in the state also charge their own smaller REETs on top of the state’s rate. In most jurisdictions, this amounts to an additional 0.25% or 0.50% of each selling price threshold.
Real Estate Transfer Taxes: What Is This Little-Known Extra Cost to Sell Your Home?
Calculating the graduated real estate excise tax
Example A
Let’s say you’re selling your home in Oakville, Washington, for $600,000. Since the local REET in Oakville is 0.25%, the first $525,000 is taxed at 1.35% (.25% + 1.1%). The remaining $75,000 is taxed at 1.53% (.25% + 1.28%).
$525,000 x 1.35% =
$7,087.50
$75,000 x 1.53% =
$1,147.50
Total taxes
$8,235
Example B
Now, let’s say you’re selling your home in Seattle for $4 million. Since the local REET in Seattle is 0.5%, the first $525,000 is taxed at 1.60%. The next $1 million is taxed at 1.78%. The next $1.5 million is taxed at 3.25%, and the final $975,000 is taxed at 3.5%.
$525,000 x 1.60% =
$8,400
$1,000,000 x 1.78% =
$17,800
$1,500,000 x 3.25% =
$48,750
$975,000 x 3.5% =
$34,125
Total taxes
$109,075
Is selling a house considered income or taxable gain?
Since Washington doesn’t have an income tax, and real estate is exempt from the state’s capital gains tax, the profits made from the sale of a home can’t really be classified as either income or taxable gain on the state level.
On the federal level, a home sale can be taxed as either regular income or a capital gain, depending on how long you’ve owned the property. If you buy and sell the home within the same year, any profit you make from that sale is considered a short-term capital gain and is taxed at the same rate as ordinary income.
If you’ve owned the home for at least a year before selling it, then any profit is considered a long-term capital gain, which typically has a lower tax rate.
Example
Let’s say you buy a home for $200,000 and then sell it for $300,000 nine months later. That $100,000 would be considered regular income and be taxed based on your tax bracket, of which there are seven ranging from 10% to 37%.
If you sell the home after a year of owning it, the profit would be considered a long-term gain and taxed at either 0%, 15%, or 20% (possibly higher in certain situations), depending on your overall income that year.
However, there are ways to limit or avoid capital gains tax on your home sale.
1. Standard tax exclusion
Long-term gains from a home sale can qualify for a standard tax exclusion if you’ve owned and used the home as your primary residence for two of the last five years prior to the sale. For it to qualify as your primary residence, you must occupy it for the greater part (6+ months) of each of those two years.
The exclusion is as follows:
· If you’re a single tax filer and you sell your primary home, you can exclude up to a $250,000 gain.
· If you’re married and filing jointly, you can exclude up to a $500,000 gain in the sale of your primary home.
You may take the exclusion only once during a two-year period.
For a list of exceptions to the primary residence eligibility test, see IRS Publication 523.
2. Calculating basis
To calculate the capital gains from your home sale, you deduct your home’s adjusted cost basis from the sales price.
A home’s adjusted cost basis is the overall amount you’ve put into buying, improving, and selling the home. This can include such costs as transfer taxes, escrow fees, appraisal fees, agent commissions, and any major capital improvements. For a list of the capital improvements you can add to the cost basis of your home.
**KEEP ALL RECEIPTS FOR THE WORK**
Carefully adding all of these expenses up can reduce your taxable gains.
How much is capital gains tax on rental property or a second home?
Unless you’ve owned and used your rental property or second home as your primary residence for two of the last five years prior to selling it, then the sale typically won’t qualify for the standard federal tax exclusion.
Two other methods of possibly reducing your capital gains from investment properties are through tax-loss harvesting and the 1031 exchange rule.
Tax-loss harvesting is simply reducing your taxable gain from an investment by taking a loss on another investment. So, if you make money selling your vacation home, perhaps you have some poorly performing stocks you’d like to sell off before the year is up.
The 1031 exchange rule allows you to defer capital gains by taking the money you’ve earned from your rental sale and reinvesting it into a “like-kind” rental property. This requires timely action. The new investment property has to be chosen within 45 days of the original property’s sale, and the new purchase has to be completed within 180 days.
When in doubt, talk to a professional
Washington’s real estate tax environment isn’t the harshest in the country, but it’s certainly not the cheapest.
Knowing how to navigate your local tax system can make a significant difference when selling a home. That’s why it’s always best to consult with a real estate accountant or tax professional, and partner with a top agent who specializes in this sort of work in your area. They can help you determine your adjusted cost basis and identify opportunities to reduce your capital gains liability so you don’t pay more than you absolutely have to. Consult a tax advisor.
-Iman News