Capital Gains on Inherited Property in Washington State

An inherited house in Washington State often comes with an unexpected tax advantage: the step-up in basis effectively resets the property's cost to its current market value, eliminating decades of accumulated capital gains. Understanding exactly how this works — and what other state taxes apply to an inherited property sale — keeps executors and beneficiaries from overpaying when they eventually sell.

The Federal Step-Up in Basis Eliminates Most Capital Gains

Under Internal Revenue Code Section 1014, inherited property receives a new cost basis equal to its fair market value on the date of the decedent's death.

If the decedent bought a home in 1990 for $120,000 and it was worth $750,000 when they died, the heir inherits the property with a $750,000 basis. If the heir sells it for $750,000 six months later, their federal capital gain is zero — even though the property appreciated $630,000 during the decedent's lifetime.

This mechanism permanently forgives the capital gains that accrued before death. It does not forgive appreciation that occurs after death — if the heir holds the property for two years and sells it for $900,000, they owe capital gains tax on the $150,000 of post-inheritance appreciation.

Washington's Double Step-Up for Community Property

Washington is a community property state. When a married person dies in Washington, the federal step-up applies to both halves of community property — not just the deceased spouse's half.

If a married couple purchased their home for $200,000 and it was worth $1,000,000 when the first spouse died, the entire property's cost basis is stepped up to $1,000,000. If the surviving spouse sells the property immediately for $1,000,000, their federal capital gain is zero. In a common law property state, only the decedent's half would receive the step-up, leaving the survivor with taxable gains on their 50%.

For Washington couples with a jointly held family home that has appreciated significantly, the double step-up is often worth more in tax savings than the value of the home's appreciation since purchase.

Does Washington's Capital Gains Excise Tax Apply?

Since 2023, Washington imposes a 7% capital gains excise tax on long-term capital gains from the sale of stocks, bonds, and business interests. The tax applies only to gains exceeding an annual inflation-adjusted standard deduction ($278,000 for 2025).

Real estate is explicitly exempt from Washington's capital gains excise tax. Sales of real property — including inherited homes — are not subject to the 7% levy regardless of the gain size. This exemption is written directly into the statute.

So when an executor or heir sells inherited Washington real estate:

• Federal capital gains tax applies only to appreciation after the date of death (due to the step-up in basis)
• Washington's capital gains excise tax does not apply (real estate is exempt)
• Washington's Real Estate Excise Tax (REET) may apply — but inheritance transfers have a specific exemption (see below)

The Real Estate Excise Tax (REET) and the Inheritance Exemption

Washington imposes a Real Estate Excise Tax (REET) on the sale or transfer of real property. The tax uses a graduated rate structure based on sale price, with state rates ranging from 1.1% to 3.0%, plus any applicable city or county overlay.

However, transfers of real property through inheritance or devise are explicitly exempt from REET under Washington Administrative Code (WAC) 458-61A-202. The inheritance transfer itself — from the estate to the heir — is not a taxable transfer for REET purposes.

What is subject to REET: when the heir subsequently sells the property to a third-party buyer, the standard REET rates apply to that sale. The exemption covers the transfer from estate to heir, not the subsequent arm's-length sale.

To claim the inheritance REET exemption, the executor or heir typically must present either Letters Testamentary (if the estate was formally probated) or a Lack of Probate Affidavit (if the property passed via Community Property Agreement, Transfer on Death Deed, or other non-probate mechanism) to the county auditor at the time of the inheritance transfer.

Selling an Inherited House: The Full Tax Picture

When an executor or heir sells inherited Washington real estate, the taxes to consider are:

1. Federal income tax on capital gains (Form 1040 or Form 1041): The gain is calculated as the sale price minus the stepped-up basis (date-of-death fair market value) minus selling costs (commissions, transfer fees). If the stepped-up basis equals or exceeds the sale price, the taxable gain is zero.

2. Washington capital gains excise tax: Not applicable. Real estate sales are exempt.

3. Washington Real Estate Excise Tax (REET) on the sale to the buyer: Applies to the sale proceeds at the standard graduated rates. This is a cost of the sale transaction, not a capital gains tax.

4. Washington estate tax (if applicable): The inherited property was included in the gross estate for Washington estate tax calculation at the date-of-death value. The estate tax is settled before the property is transferred to heirs — it is not triggered by the heir's subsequent sale.

What Documentation You Need Before Selling

To properly establish the stepped-up basis and document the inheritance REET exemption, the executor or heir needs:

Date-of-death appraisal: A formal appraisal by a licensed appraiser documenting the property's fair market value on the date of death. This is the cornerstone document for establishing the stepped-up basis. Without it, the IRS may contest the basis if the property is later sold at an apparent gain.

Death certificate (certified copy): Required by the county auditor, title company, and closing agent.

Letters Testamentary or equivalent authority document: Proves the executor or heir has legal authority to transfer the property. For non-probate transfers, a Lack of Probate Affidavit or Community Property Agreement may substitute.

Estate tax clearance from the Washington DOR (if applicable): If the gross estate exceeded the Washington estate tax threshold, the DOR issues a tax release after the estate tax return is processed and payment confirmed. Title companies typically require this release before insuring the transfer of estate real property.

After the Step-Up: The Holding Period Reset

The tax basis resets at death, but the holding period for the inherited asset does not matter in the same way as for an asset purchased during life. Under IRC Section 1223(11), inherited property is automatically treated as held for more than one year, regardless of how long the heir actually holds it. This means any gain recognized by the heir on a subsequent sale is automatically treated as long-term capital gain, subject to preferential federal rates (0%, 15%, or 20% depending on the heir's income), rather than short-term ordinary income rates.

Practical Implications

For most Washington heirs selling inherited property promptly, the combined effect of the step-up in basis, the community property double step-up, and the real estate exemption from the capital gains excise tax means the tax exposure on an inherited home sale is minimal to zero.

The bigger tax concern in most Washington estates is the estate tax itself — with its $3 million threshold and rates reaching 35% before July 1, 2026 — and the nine-month deadline for filing and paying it. The capital gains on the subsequent sale to a third-party buyer are typically a secondary issue.

The Washington Final Tax & Estate Tax Guide covers both the estate tax filing sequence and the documentation required to establish stepped-up basis values and claim the inheritance REET exemption — the two practical tasks that executors encounter most frequently when estate real estate is involved.

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