If you’re a real estate investor looking at selling a property, or if you’re thinking of buying a property now and thinking long term about selling it, then you might be worried about what taxes you’ll incur. In this blog post you’ll read about investment property taxes capital gains – what Port Orchard investors should know about capital gains.
Before you read further, you should be aware that this information is provided in general to a wide range of readers – each person reading in a different area inside or outside of Washington, perhaps with different corporate structures, any many other factors. So we’re providing a helpful overview but you should always talk to an accountant and tax attorney before making any final decisions for yourself.
Navigating Tax Categories for Port Orchard Real Estate
Understanding how different income streams are taxed is essential for homeowners in Port Orchard, where local market shifts can significantly impact your bottom line. Just as your primary salary from a Kitsap County employer is taxed at standard federal rates, other financial gains—such as dividends from stocks or the profit from a property sale in neighborhoods like Southworth or Manchester—are subject to specific tax structures. For real estate investors, the most critical distinction to grasp is how the IRS treats income derived from capital gains versus ordinary rental income. As property values in the South Kitsap area continue to trend upward, being aware of these varied rates ensures you are not caught off guard during tax season after a successful closing.
Understanding Capital Gains in the Local Market
At its core, a capital gain is the difference between your “basis” (the original purchase price plus certain improvements) and the final sale price. For example, if you purchased a charming craftsman in East Port Orchard years ago for $300,000 and sell it in today’s market for the current median price of approximately $622,000, that $322,000 difference represents your capital gain. In the Port Orchard housing market, where we’ve seen steady year-over-year appreciation, these gains can be substantial. This “profit” is the specific portion of the transaction that the federal government targets with capital gains tax rates, rather than the entire check you receive at the closing table.
The Economic Logic Behind Preferential Rates
Capital gains tax rates for 2025 remain tiered at 0%, 15%, or 20%, which is generally much lower than the 10% to 37% brackets applied to ordinary income. The government utilizes these lower rates to incentivize the buying and selling of assets, which keeps the Kitsap County economy fluid and encourages investment in local communities like McCormick Woods or Sunnyslope. By keeping more money in your pocket, these rates allow sellers to reinvest their equity into new ventures or upgraded residences. Without this favorable treatment, the high tax burden on significant real estate gains could act as a deterrent, potentially stagnating the local market and making it harder for new buyers to find available inventory.
Primary Residence vs. Investment Property Nuances
It is vital to distinguish between selling the home you live in and an investment property, as the tax implications differ drastically. If you are selling your primary residence in an area like Glenwood or Parkwood, you may qualify for the Section 121 exclusion, which allows individuals to exclude up to $250,000 (or $500,000 for married couples) of gain from their taxes, provided they have lived in the home for two of the last five years. Conversely, secondary properties or rentals typically do not qualify for this exclusion and may also be subject to “depreciation recapture” or the 3.8% Net Investment Income Tax for high-earning households. Because every financial situation in the Port Orchard area is unique, we highly recommend consulting with a tax attorney or CPA to navigate these complexities before finalizing your sale with Kitsap Home Pro.