Selling a house, especially during a divorce, raises a question I get asked constantly: will I owe taxes on this? Here’s the general shape of how it works for a Seattle-area home, though the specifics of your situation are worth running past a CPA before you sell.
The Likelihood of Paying Taxes on the Sale of Your Home
Most homeowners never owe federal capital gains tax on selling their primary residence, thanks to the Section 121 exclusion. Washington also has no state income tax, so unlike sellers in most other states, you’re only ever looking at a potential federal capital gains bill, not a state one on top of it.
That said, Washington does charge a Real Estate Excise Tax (REET) on the sale itself, paid by the seller, calculated as a percentage of the sale price on a graduated scale. It applies regardless of whether you owe capital gains tax, so it’s worth budgeting for separately.
How Capital Gains Taxes Work
If your gain (sale price minus what you originally paid, plus qualifying improvements) is under $250,000 for a single filer or $500,000 for a married couple filing jointly, you typically owe nothing in federal capital gains tax on the sale, as long as you meet the ownership and use tests below.
How to Qualify for the Exclusion
The IRS generally requires:
- You’ve owned the home for at least two of the past five years before the sale (doesn’t need to be continuous). If married filing jointly, only one spouse needs to meet this ownership test.
- The home was your principal residence for at least two of the five years before the sale. If married filing jointly, both spouses need to meet this use test.
- You haven’t already used the exclusion on another home sale within the two years before this one.
Special Circumstances
The IRS carves out exceptions to the standard two-year rule for situations including:
- Gaining ownership of the home during a separation or divorce
- Your spouse passing away while you owned the home
- Owning a “remainder interest” in the home when you sell
- Your previous home being condemned
- Active military service during your ownership of the home
- A “like-kind” exchange involving the property
The divorce exception matters a lot in practice. If you got the house as part of a settlement and haven’t personally lived in it for two full years yet, you may still qualify depending on how the transfer was structured, which is exactly the kind of detail a CPA should confirm before you sell.
Get Professional Assistance
I’m not a CPA or tax attorney, and nothing here should be treated as tax advice for your specific situation. Before you sell, especially if a divorce, inheritance, or investment property is involved, it’s worth a short call with a CPA who can look at your actual numbers. I’m glad to connect you with someone I trust if you don’t already have one.
Don’t Forget Washington’s Real Estate Excise Tax
Washington’s Real Estate Excise Tax, or REET, is separate from any capital gains tax and applies to almost every real estate sale in the state regardless of whether you made a profit. It’s a graduated tax based on the sale price, roughly 1.1% on the portion of the price up to $525,000 and higher percentages on amounts above that, and it’s paid by the seller at closing. The title company calculates and collects it automatically as part of closing, so it’s not something you need to figure out yourself, but it’s worth knowing it exists separately from whatever you owe, or don’t owe, on capital gains, since the two get confused often.
How Divorce Timing Affects the Ownership and Use Test
There’s also a specific wrinkle in the tax code worth knowing if you moved out of the house before the divorce was finalized. The IRS generally requires you to have lived in the home as your primary residence for two of the last five years to qualify for the capital gains exclusion, but if your divorce or separation agreement gave your former spouse the right to continue living in the house, the time they lived there can still count toward your own two-year use requirement. This only works if it’s spelled out in the agreement, so it’s worth raising with your attorney before the decree is finalized rather than after.
One Thing Washington Sellers Have That Many Other States Don’t
Washington has no state income tax, which means any capital gain from selling a home that isn’t already excluded federally still avoids a state-level tax bite that sellers in states like California, Oregon, or New York would face on the same transaction. That’s not a reason to skip proper tax planning around the sale, since federal capital gains tax still applies to anything above the exclusion amount, but it’s a genuine advantage of selling a house here versus in most of the rest of the country, and it’s worth knowing when comparing this to any prior experience selling property elsewhere.
Here’s how the exclusion actually plays out with real numbers. Say a married couple bought their Seattle home for $400,000 and sells it for $900,000 during their divorce, a $500,000 gain. If they still meet the ownership and use test and file a joint return for that tax year, the full $500,000 gain is excluded and they owe zero federal capital gains tax on the sale. If the divorce is finalized before the sale and they file separately, each spouse can only exclude $250,000 individually, meaning zero is owed only if the gain is split evenly and each half stays under $250,000. This is exactly why the timing of a sale relative to when a divorce is finalized can be worth thousands of dollars, and why it’s worth discussing with an attorney and a tax professional together, not separately.
If you’re weighing a sale and want to talk through timing or next steps, call (206) 900-8173 or send us a message.