Thinking about selling your Bainbridge Island home and wondering how taxes will impact your bottom line? You are not alone. Between federal capital gains rules, Washington’s exemptions, and closing taxes, it can feel confusing fast. This guide breaks it down in plain English, so you know what to expect, what you may owe, and how to plan ahead. Let’s dive in.
Quick answer: Will you owe tax in Washington?
Good news. Washington’s capital gains excise tax generally does not apply to the direct sale of real estate. The Washington Department of Revenue lists real estate as an exemption, which means a typical Bainbridge Island home sale is not subject to the state capital gains excise tax. See the state’s overview of exemptions on the Department of Revenue’s capital gains tax page for details: Washington’s capital gains excise tax and exemptions.
In 2025, the state added a tiered surcharge for the capital gains excise tax, but the real estate exemption remains. You can read the state’s notice on the tiered rates here: Washington’s new tiered capital gains rates.
What you will pay at closing is Washington’s Real Estate Excise Tax, often called REET. REET is separate from capital gains. It is a transfer tax paid when property changes hands. See more on REET in the section below.
What counts as capital gain on a home sale
Your federal capital gain equals your amount realized minus your adjusted basis. Amount realized is the sale price minus selling costs. Adjusted basis usually starts with what you paid for the home, then adds capital improvements and certain settlement costs, and subtracts depreciation if you claimed it. The IRS explains basis rules in Publication 551.
The primary residence exclusion
If you owned and lived in your home for at least two of the last five years, you may exclude up to $250,000 of gain if single or up to $500,000 if married filing jointly. There are rules around timing, partial exclusions for certain life events, and limits on how often you can use the exclusion. See examples and worksheets in IRS Publication 523, Selling Your Home.
Basis and improvements
Your basis increases when you make qualifying capital improvements, such as a new roof, an addition, or major systems with a long useful life. Keep receipts and your closing statements. The IRS details what you can add to basis in Publication 551.
Depreciation recapture if you rented or used a home office
If you rented the home or claimed depreciation for a home office, the depreciation you took is generally taxed when you sell. This “recapture” is not fully excludable under the home sale exclusion and can be taxed at rates up to 25 percent. Read about rental or business use and the home exclusion in Publication 523.
Federal rates and the 3.8 percent NIIT
Long‑term capital gains are taxed at 0 percent, 15 percent, or 20 percent depending on your income. Thresholds adjust each year, so check current brackets like those summarized by Kiplinger’s capital gains rate guide. High‑income taxpayers may also owe the 3.8 percent Net Investment Income Tax. See IRS Publication 550 for NIIT rules and thresholds.
Bainbridge closing taxes you will pay
Washington’s Real Estate Excise Tax applies to most property transfers and is typically paid by the seller. The state portion uses graduated rates, and Bainbridge Island has an added local rate. See the overview at Washington DOR’s REET page.
- State portion for residential sales: 1.10 percent on the first $525,000, 1.28 percent from $525,000.01 to $1,525,000, 2.75 percent from $1,525,000.01 to $3,025,000, and 3.00 percent above $3,025,000.
- Bainbridge Island local portion: 0.50 percent. See the current location‑rate table in the DOR PDF: Local REET rate for Bainbridge Island.
Example: On a $700,000 sale, the state portion is about $8,015 and the local portion is $3,500 for a combined REET near $11,515, plus small processing fees. Your escrow team will calculate the exact amount for your closing date.
Special situations sellers ask about
Converted rental or partial rental
If your Bainbridge home was rented in the past or you claimed a home office, the §121 exclusion can still apply, but depreciation must be recaptured and certain nonqualified use periods can reduce the exclusion. See examples in Publication 523.
Selling an entity interest instead of the deed
If you sell an ownership interest in an entity that owns real estate, Washington’s capital gains excise tax rules get technical. The real estate exemption does not automatically cover all entity sales. Work with a CPA or attorney and review the Department of Revenue’s guidance on capital gains tax at Washington’s capital gains excise tax.
1031 exchanges for investment property
A 1031 exchange can defer taxes on real property held for investment or business, not your primary residence. Exchanges have strict 45‑day and 180‑day timelines and must be reported on Form 8824. Learn the basics in IRS Publication 544.
Foreign sellers and FIRPTA
If a seller is a foreign person, buyers generally must withhold 15 percent of the amount realized under FIRPTA. There are exceptions and withholding certificates in some cases. Review the process and timelines on the IRS FIRPTA page.
Planning checklist before you list
- Confirm you meet the two‑of‑five‑years tests and have not used the exclusion in the past two years. See Publication 523.
- Gather basis records: purchase documents, closing statements, and receipts for capital improvements. See Publication 551.
- Estimate selling costs to reduce your gain: commissions, title and escrow, legal fees needed to close, and other allowable costs. Guidance is in Publication 551.
- If you had rental or business use, estimate depreciation recapture and how it affects your exclusion. See Publication 523.
- Run a REET estimate using state bands and the local 0.50 percent rate. Start with the REET overview.
- Ask your CPA about NIIT exposure and current capital gains brackets. See Publication 550 and the Kiplinger bracket summary.
Example: how the math can pencil out
Here is a simple illustration. You bought for $600,000 and invested $50,000 in capital improvements, so your adjusted basis is $650,000. You sell for $1,200,000 and pay $72,000 in selling costs. Your amount realized is $1,128,000 and your gain is $478,000.
- If you are married filing jointly and meet the §121 rules, your $500,000 exclusion covers the entire $478,000. No federal capital gains tax would be due on this example.
- If you are single and meet the §121 rules, you could exclude $250,000. About $228,000 would be subject to federal long‑term capital gains rates and possibly NIIT depending on your income. See Publication 523 and Publication 551 for how to compute your numbers.
What to keep and how to report
Keep your purchase and sale closing statements, receipts for improvements, and records of any rental or business use. If your gain is not fully excluded, you typically report the sale on Form 8949 and Schedule D. If there was business use, parts of the sale may also be reported on Form 4797. The IRS provides reporting guidance and worksheets in Publication 523.
Ready to sell with clarity?
You deserve a calm, well‑planned sale with no tax surprises. If you are considering selling on Bainbridge Island, we are here to help you prep, price, and position your home, and coordinate with your tax professional so your proceeds are clear from day one. Reach out to McLaughlin & Co. for a thoughtful, local strategy.
FAQs
Do Washington home sellers pay state capital gains tax on a Bainbridge sale?
- Washington’s capital gains excise tax generally exempts direct sales of real estate, so typical home sales are not subject to that state tax, but REET still applies and federal rules may create taxable gain depending on your situation.
What is the $250,000 or $500,000 home sale exclusion and who qualifies?
- If you owned and lived in the home for at least two of the last five years and meet other rules, you may exclude up to $250,000 of gain if single or $500,000 if married filing jointly, as outlined in IRS Publication 523.
What closing taxes and fees will I pay when selling on Bainbridge Island?
- Expect Washington’s Real Estate Excise Tax using the state’s graduated rates plus Bainbridge’s 0.50 percent local rate, along with standard selling costs that reduce your taxable gain; see the REET overview.
I rented my Bainbridge home for a year; how does that affect my taxes?
- Depreciation claimed for rental use must be recaptured and is not fully excludable under §121, and certain nonqualified use periods can limit the exclusion; see Publication 523.
Can I do a 1031 exchange for my Bainbridge primary home?
- No, 1031 exchanges are for property held for investment or business; primary residences do not qualify, which the IRS explains in Publication 544.
What should foreign sellers know about a Bainbridge sale?
- Buyers generally must withhold 15 percent under FIRPTA when purchasing from a foreign seller, with possible exceptions or reduced‑withholding certificates; see the IRS FIRPTA page.
What records should I keep to support my basis and gain calculation?
- Keep closing statements, receipts for capital improvements, and any depreciation records for rental or business use, as described in Publication 551.
