Capital gains tax in Washington (2026): selling a business, real estate or farm

An excise on gains, not an income tax

Washington still has no tax on wages or business profits in 2026. What it does have is a separate excise on the sale or exchange of long-term capital assets, imposed only on individuals: 7% of Washington capital gains, plus 2.9% on the portion above $1,000,000 starting with 2025 sales (RCW 82.87.040). Owners of S corporations, partnerships, LLCs and grantor trusts are treated as owning their share of what the entity sells, so an entity-level sale still lands on the owner's personal Washington return (RCW 82.87.040(4), 2025 text).

The tax was challenged as an unconstitutional income tax. In Quinn v. State (2023) the Washington Supreme Court upheld it as a valid excise on the transaction, which is why it is filed on its own return rather than an income tax return. Starting in 2028 a separate 9.9% tax on Washington taxable income over $1,000,000 is scheduled under SB 6346 (signed March 30, 2026), with a credit for capital gains excise paid; it does not touch a 2026 or 2027 closing.

What Washington leaves out of the base

The exemptions are where a Washington seller's planning starts, because they remove whole asset classes rather than trimming a rate (RCW 82.87.050, current text):

• Real estate transferred by deed or real estate contract, for residents and nonresidents alike.
• Entity interests to the extent the gain comes from real estate the entity owns directly, measured as fair market value less basis times the share sold. An appraisal or the buyer and seller's IRC 1060 allocation can set the value, but DOR is not bound by an allocation that misstates it.
• Depreciable business property (IRC 167 or 179 property), so equipment, vehicles and fixtures in an asset sale fall outside the excise.
• Timber and timberland, cattle, horses and breeding livestock for sellers with over 50% of gross income from farming or ranching, commercial fishing privileges, condemnation sales, retirement accounts, and goodwill from selling a franchised auto dealership (DOR, 2026 page).

What is left is mostly goodwill, stock, partnership interests in operating companies, and investment portfolios. That is why a Washington owner's purchase price allocation matters twice: the IRS cares about ordinary versus capital, and Washington cares about real estate and equipment versus goodwill.

Worked example: the same $3 million gain, three ways

A joint-filing couple with $250,000 of other income has $3,000,000 of long-term gain to recognize in 2026 (federal rates for that year are 0%, 15% and 20%, with 20% above $613,700 of joint taxable income under Rev. Proc. 2025-32; the federal capital gains guide covers that layer).

• Selling the operating business for cash: Washington takes $240,478, and total tax caused by the sale is $1,035,925, an effective 32.4%.
• Selling a commercial building with the same gain: Washington takes $0 because real estate is exempt (RCW 82.87.050, 2025). Total tax falls to $761,135.
• Selling the business on a 5-year note: each year gets its own standard deduction and stays under the $1,000,000 line where the extra 2.9% starts (RCW 82.87.040, 2025). Washington tax drops to $112,700, a difference of $127,778 versus cash.

Washington follows the federal installment method, so gain is reported as payments arrive (WAC 458-20-301). The installment sale analysis covers the buyer-credit side: down payment, security, personal guarantee and default terms.

The qualified family-owned small business deduction

A Washington owner who sells at least 90% of a family business's assets, or of the owner's interest in it, can deduct the entire resulting gain (RCW 82.87.070). The tests are strict:

• The seller held a qualifying interest for at least five years before the sale; a change of entity type alone does not restart the clock.
• The seller or family members materially participated, under the IRC 469 standards, for at least five of the ten years before the sale (not required for a sale to a qualified heir).
• Worldwide gross revenue in the 12 months before the sale was at most $11,095,000 for 2025 (DOR inflation table; the statute's base is $10,000,000).
• Family ownership of at least 50%, or at least 30% with two families at 70% or three families at 90%.

Revenue timing matters: a strong final year can push a company over the cap. A business close to the line should look at the trailing 12 months before signing.

Charitable gifts and the deduction stack

Gifts to charities principally directed and managed in Washington get their own deduction: donations above $278,000 in the year, deductible up to $111,000 (2025 DOR figures, RCW 82.87.080). It cannot be carried forward or back, so a gift has to land in the sale year to count. National charities managed outside the state do not qualify for this piece, though they still count federally.

A charitable remainder trust works differently: stock or an interest transferred to the trust before a binding sale means the trust, not the owner, sells. Losses help only if they are Washington-allocated long-term losses from 2022 or later; older carryforwards are added back on the return (DOR FAQ, 2026).

Allocation: domicile at the moment of sale

Gains on stock, bonds, partnership interests and other intangibles are allocated to Washington when the seller is domiciled in Washington at the time of the sale (DOR FAQ, 2026). That date controls even when the cash arrives later: an installment note signed while living in Bellevue keeps the gain Washington-allocated after a move to Idaho, because the sale happened here. A real change of domicile has to come first; the moving-before-the-sale analysis covers the proof.

Washington gives a credit for income or excise tax paid to another state on gains from assets located there, and a credit for business and occupation tax paid on the same sale (DOR, 2025 and later). Gain excluded federally under IRC 1202 is not taxed by Washington either (DOR FAQ, 2026), which makes QSBS worth checking for tech founders.

REET: the tax that does apply to real estate

Exempt from the excise does not mean untaxed. The real estate excise tax applies to nearly every Washington property sale and is usually paid by the seller. The state portion is graduated: 1.1% up to $525,000 of price, 1.28% to $1,525,000, 2.75% to $3,025,000 and 3% above that (DOR, sales from 2023 through 2026), plus a local rate. Classified agricultural land and timberland stay at a flat 1.28% state rate. From January 1, 2027 the brackets rise to $551,000, $1,551,000 and $3,051,000 (DOR, RCW 82.45.060).

Selling a controlling interest in an entity that owns Washington real property is reported to DOR as a controlling interest transfer, so the entity route that escapes the capital gains excise can still carry REET. Farm and ranch owners should read the farmland gains guide alongside this page.

Estate tax: the other Washington bill

Washington's estate tax exclusion is $3,076,000 for deaths from January 1 to June 30, 2026 and $3,000,000 after that, with rates reaching 35% for deaths from July 1, 2025 through June 30, 2026 and returning to a 20% top rate for deaths on or after July 1, 2026 (DOR estate tax tables, 2026). A business owner who holds instead of selling gets a federal basis step-up, but the value may still sit inside a Washington taxable estate; the hold-for-step-up analysis weighs both sides. Get the Big Sale Tax Analysis at /analysis/ to model cash, note and charitable paths with Washington's deductions in the math.

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