Guides
Home Sale Capital Gains
Selling your primary residence in Seattle is treated differently than selling a rental. Under Section 121 of the Internal Revenue Code, you can exclude up to 250,000 dollars of gain if you file individually, or up to 500,000 dollars if you file a joint return, as long as you owned and used the home as your primary residence for at least two of the five years before the sale. This exclusion is separate from a 1031 exchange, which applies to investment or business property, not personal residences. Some owners with mixed-use properties, such as a home with a rental unit or a former rental converted to a primary residence, can potentially use both provisions, but the rules for combining them are technical and fact-specific.
What You Get
Key Outcomes
Confirmation of whether your ownership and use history satisfies the two-of-five-year test
A clear explanation of your exclusion amount based on filing status and any prior exclusion use
An assessment of whether any rental or business use portion of the property needs separate treatment
Deliverables
What We Deliver
- A timeline worksheet documenting your ownership and use periods against the two-year requirements
- A written exclusion eligibility summary citing your specific facts
- Guidance on documentation to keep for the Internal Revenue Service if a portion of the home was rented
Process
Execution Timeline
Day 0: Review your ownership dates, occupancy history, and any rental or business use periods
Day 4: Confirm exclusion eligibility and amount, and flag any mixed-use complications
Day 8: Provide a summary you can share with your tax preparer before closing
Common Questions
Frequently Asked
How much gain can I exclude when I sell my primary residence?
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You can exclude up to 250,000 dollars of gain as a single filer or up to 500,000 dollars as a married couple filing a joint return, provided you owned and used the home as your primary residence for at least two of the five years immediately preceding the sale. The two years of ownership and two years of use do not need to be continuous or the same two years, and you generally cannot have used the exclusion on another home sale within the prior two years.
Can I use both the Section 121 exclusion and a 1031 exchange on the same property?
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In limited circumstances, yes. If a property has both a personal residence portion and a separate rental or business use portion, such as a duplex where you live in one unit and rent the other, you may be able to apply the Section 121 exclusion to the personal-use portion's gain and a 1031 exchange to the rental portion's gain. This requires careful allocation between the two uses and is an area where coordinating with a qualified intermediary and your tax advisor before closing is important.
What if I only lived in the home for one year before selling?
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If you do not meet the full two-year ownership and use requirement, you may still qualify for a partial exclusion if the sale was due to a change in employment location, health reasons, or certain other unforeseeable circumstances defined by the Internal Revenue Service. The partial exclusion is generally prorated based on the portion of the two-year period you actually satisfied, rather than the full 250,000 or 500,000 dollar amount.
Does Washington add any additional tax on the sale of my home?
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Washington has no state personal income tax, and its capital gains excise tax specifically excludes real estate sales, so there is no additional state-level capital gains tax on a home sale. Washington does impose a real estate excise tax on the sale price of real property generally, which is a transfer tax rather than an income or capital gains tax, and it applies regardless of whether you qualify for the Section 121 exclusion.
What happens if my gain exceeds the exclusion amount?
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Any gain above your available exclusion, 250,000 dollars for single filers or 500,000 dollars for joint filers, is taxed as a capital gain at the applicable federal long-term or short-term rate depending on your holding period. This scenario is increasingly common in Seattle given long-term appreciation, so owners with substantial equity sometimes explore whether a portion of the property had rental use that could support a partial 1031 exchange alongside the exclusion.
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