Selling your home in Seattle is an exciting milestone. Maybe you’re upgrading to a new house, downsizing, or moving out of the area altogether. But amid the paperwork and logistics, there’s a topic that often catches home sellers off guard: capital gains tax when selling a home.

Yes, when you sell your home for more than you bought it, Uncle Sam may want a cut of those profits. And depending on how long you’ve lived in your home and how much you’ve profited, capital gains tax could take a significant chunk.

But don’t worry—we’ve got you covered. In this post, we’ll walk you through what capital gains tax is, when it applies, and how you might be able to avoid it (legally, of course!). This post is designed to help home sellers in the Seattle real estate market better understand capital gains tax so you can plan your sale with confidence.

“Did you know? In 2023, the IRS allowed homeowners to exclude up to $250,000 in capital gains for individuals and $500,000 for married couples filing jointly. That’s a big chunk of tax-free profit!”

What to Expect in This Blog:

• What capital gains tax is and why it matters when selling your home in Seattle.
• Exemptions available for Seattle homeowners that may help reduce or avoid capital gains tax.
• Tips for lowering your taxable gains.
• The importance of consulting a tax professional.
• How The Madrona Group can assist you in navigating the Seattle real estate market and make sure you’re prepared for every aspect of your home sale.

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What is Capital Gains Tax?

Let’s start with the basics: capital gains tax is a tax on the profit you make from selling certain types of assets, like a home. In the case of real estate, it’s the difference between what you originally paid for the property (your “cost basis”) and what you sell it for, current market value.

If you bought your Seattle home for $400,000 and sold it for $700,000, that $300,000 difference is your capital gain.

In theory, that gain is subject to capital gains tax. But don’t worry yet—there are exemptions and strategies to help reduce what you owe.

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Are Seattle Homeowners Exempt from Capital Gains Tax?

Here’s the good news: the IRS offers an exclusion for homeowners that can reduce or eliminate your tax burden when selling a primary residence. If you meet the criteria, you can exclude a large portion of your gain from taxes:

• Single Filers: You can exclude up to $250,000 of capital gains from your taxable income.
• Married Filers: Couples filing jointly can exclude up to $500,000.

So, if your gains are within these limits, you may not owe any capital gains tax. However, there are a few conditions you’ll need to meet.

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How Do You Qualify for the Exclusion?

To qualify for this generous tax exclusion, you need to meet a couple of basic requirements:

1. Primary Residence Requirement: You must have owned and lived in the home as your primary residence for at least two of the five years before the sale.
2. No Recent Exclusion: You can’t have used the capital gains tax exclusion on another property within the past two years.

Example:

Let’s say you’ve lived in your Seattle home for the last three years and are now selling it for a $400,000 profit. If you’re married and filing jointly, you can exclude up to $500,000 of that gain, so you wouldn’t owe any capital gains tax.

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What If You Don’t Qualify for the Full Exclusion?

If you don’t meet the two-out-of-five-year rule, all hope isn’t lost. There are partial exclusions available for specific situations.

For example, if you had to sell because of a job relocation, a health issue, or other unforeseen circumstances, you may still qualify for a reduced exclusion.

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Capital Gains Tax Rates

If you don’t qualify for the exclusion or your gains exceed the exclusion limits, the next question is: how much will you pay? The tax rate depends on how long you’ve owned the property:

• Short-Term Gains: If you’ve owned your Seattle home for less than a year, your gains will be taxed at your regular income tax rate, which could be as high as 37%.
• Long-Term Gains: If you’ve owned your home for more than a year, your gains will be taxed at the long-term capital gains rate, which ranges from 0% to 20% depending on your total taxable income.

Most homeowners in Seattle who have lived in their homes for a while will fall into the long-term category, which tends to offer a more favorable tax rate.

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How to Reduce Your Capital Gains Tax Liability

Even if you don’t qualify for the full exclusion, there are several strategies you can use to reduce your taxable gains:

1. Keep Track of Home Improvements

Any improvements you’ve made to your Seattle home can be added to your cost basis, which lowers your total gain. This includes things like a kitchen remodel, adding a deck, or installing energy-efficient windows. Keep your receipts and records!

2. Consider Selling in a Low-Income Year

If you’re able to time your sale during a year when your income is lower, you may qualify for a lower tax rate on your capital gains. This could be especially helpful for retirees or anyone experiencing a temporary dip in income.

3. Use the 1031 Exchange (for Investment Properties)

While this doesn’t apply to primary residences, if you’re selling an investment property in Seattle, you may want to look into a 1031 exchange. This allows you to defer paying capital gains tax by reinvesting the proceeds into another similar property.

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Don’t Forget to Consult a Tax Professional

It’s important to note that while we’re offering general information about capital gains tax, we aren’t tax professionals. Real estate taxes, especially capital gains, can be complex, and the rules are subject to change.

We strongly recommend consulting a qualified tax professional to ensure you understand how capital gains tax applies to your specific situation. They’ll be able to help you make the best decisions to minimize your tax burden.

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Conclusion to Capital Gains Tax When Selling a Home

Capital gains tax can be a significant consideration when selling a home in Seattle, but with the right planning, it doesn’t have to be a deal-breaker. Here’s a quick recap of what you need to know:

• If you’ve lived in your Seattle home for two out of the last five years, you may be able to exclude up to $250,000 (single) or $500,000 (married) in capital gains.
• Home improvements and careful record-keeping can help reduce your taxable gains.
• Consult a tax professional to get personalized advice on your capital gains situation.

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How The Madrona Group Can Help You Navigate the Seattle Real Estate Market

Selling a home involves a lot of moving parts, and tax considerations like capital gains are just one piece of the puzzle. When you’re ready to sell your Seattle home, The Madrona Group is here to help every step of the way. Our team of experienced brokers understands the ins and outs of the Seattle real estate market and can provide expert advice to make your home sale as smooth as possible.

We’ll work with you to ensure you’re aware of all potential costs, including taxes, and help you prepare so there are no surprises at closing. From setting the right price to marketing your property, we’ll guide you through the entire process.