Short answer: No — gains from the sale of real property are excluded from Washington taxable income under ESSB 6346.
If you sell your home, investment property, or commercial real estate in Washington, those gains are not subject to the state's new 9.9% income tax on household income above $1 million.
This is one of the most common questions I've been getting since Governor Ferguson signed ESSB 6346 into law on March 30, 2026. And it's a reasonable question — in a state that just imposed a 9.9% tax on high earners, anyone selling a $3 million house wants to know what they owe.
Here's what you need to know.
How the Exclusion Works
ESSB 6346 imposes a 9.9% tax on "Washington taxable income" above $1 million per household. The starting point is your federal adjusted gross income (IRC §62), which then goes through a series of modifications to arrive at "Washington base income" and ultimately "Washington taxable income."
The real estate exclusion works through Section 302 of the act, which coordinates with Washington's existing capital gains tax (chapter 82.87 RCW). Section 302 strips all long-term capital gains out of your federal AGI, then adds back only the gains that are subject to the Washington capital gains tax. Since RCW 82.87.050 exempts real property from the capital gains tax, those gains get stripped out and never added back. They never enter your Washington base income and therefore never reach Washington taxable income.
This exclusion applies to:
- Primary residences — your home sale is excluded
- Investment properties — rental properties, vacation homes, land
- Commercial real estate — office buildings, retail, industrial
The statutory language in RCW 82.87.050(1) covers "all real estate transferred by deed, real estate contract, judgment, or other lawful instruments that transfer title to real property and are filed as a public record."
What You Still Owe
The real estate exclusion under ESSB 6346 does not mean your gain is tax-free. You are still subject to:
- Federal capital gains tax — up to 20%, plus the 3.8% net investment income tax
- Washington's capital gains tax — which also exempts direct real property sales under the same RCW 82.87.050 provision
So for a direct sale of real property, you're looking at federal tax only. Neither Washington's income tax nor its capital gains tax applies to the gain.
Where It Gets Less Clear
The exclusion for direct real property sales is straightforward. But several common scenarios raise questions — and some of them are actually answered by the statute, while others remain open.
Entity Sales: The Look-Through Rule
What if you sell an LLC or partnership that owns real property? The statute actually addresses this.
Under RCW 82.87.050(2), when you sell an interest in a privately held entity, the gain is exempt to the extent it is "directly attributable to the real estate owned directly by such entity." The exemption equals the fair market value of the real estate owned directly by the entity, less its basis, multiplied by the ownership percentage sold.
The key word is "directly." If your LLC owns a building, and you sell your LLC interest, you get a proportional exclusion for the gain attributable to that building. But if your LLC owns a subsidiary that owns the building, the look-through does not reach through the second layer. The gain on the parent entity sale would be fully taxable.
This matters enormously for real estate investors who use multi-tier entity structures — which is common in commercial real estate. If you're planning a sale, the entity structure you use can determine whether the gain is excluded or not.
REITs and Real Estate Funds
If you hold shares in a Real Estate Investment Trust (REIT) and receive capital gain distributions, are those covered by the real property exclusion?
The statute suggests not. RCW 82.87.050 mentions REITs only once — in subsection (7), which exempts "dividends and gains realized from the sale or exchange of interests in a real estate investment trust" but only to the extent they are derived from timber sales. Non-timber REIT distributions are not covered by the real property exemption.
This means REIT capital gain distributions likely flow through to your Washington taxable income. You're selling securities, not real property, and the statute treats them accordingly.
The safe assumption: REIT gains are includable in Washington taxable income. If you're a high earner with significant REIT holdings, this is worth confirming with your tax advisor.
Dealer Income
If you buy and sell real estate as a business — i.e., you're a "dealer" rather than an "investor" — your gains may be classified as ordinary income rather than capital gains for federal purposes. The ESSB 6346 mechanism works through Section 302, which strips out long-term capital gains specifically. Dealer gains classified as ordinary income on your federal return would not be stripped out by Section 302 — they would remain in your AGI and flow into Washington base income.
Whether the Section 302 exemption (which cross-references RCW 82.87.050) applies to short-term or ordinary gains from real property is an open question that hasn't been tested.
Examples
Example 1: Simple Home Sale
You sell your Seattle home for $4 million, with a $2 million gain. That $2 million is excluded from Washington taxable income under ESSB 6346. You owe nothing under the new income tax on this gain.
Example 2: W-2 Income Plus Home Sale
You earn $800,000 in W-2 income and sell your home at a $1.5 million gain. Your W-2 income is below the $1 million threshold, and the real estate gain is excluded. No ESSB 6346 tax.
Example 3: Entity Sale with Real Property
You sell your 50% interest in an LLC that directly owns a commercial building. The building's FMV is $6 million with a $2 million basis. Your proportional share of the real estate gain is $2 million (50% × $4 million), which is excluded. Any gain on the entity interest above the real estate attributable amount — such as goodwill or other business assets — would be taxable.
Example 4: W-2 Income Plus REIT Distributions
You earn $900,000 in W-2 income and receive $300,000 in capital gain distributions from a non-timber REIT. Because REIT distributions are not covered by the real property exclusion, your Washington taxable income could be $1.2 million — putting you $200,000 over the threshold and generating a $19,800 tax bill.
The Bottom Line
If you're selling actual real property — or an interest in an entity that directly owns real property — the new income tax doesn't touch your gain. That's a meaningful carve-out, especially in a state where home values have made millionaires out of people who don't think of themselves as high earners.
But if your real estate exposure comes through REITs, funds, multi-tier entity structures, or dealer activity, don't assume you're covered. The statute draws clear lines, and they don't always fall where you'd expect.
This is one of the areas where getting advice before your transaction closes — not after — can save you real money.
For a complete overview of ESSB 6346, see Washington's New Income Tax: What Founders, Investors, Athletes, and High Earners Need to Know.
Have questions about how Washington's new income tax applies to your situation? Book a call to discuss your specific facts.
For more on Washington's tax landscape, see the Complete Guide to Washington State Taxes for Startups.
