TL;DR
Most Bethesda homeowners who sell their primary residence owe $0 in capital gains tax, protected by the federal exclusion ($250K single / $500K married). But in a market where homes regularly sell for $1M–2M, long-tenure owners can exceed that threshold—and Maryland taxes the excess as ordinary income at combined rates up to 9%+ when you include the Montgomery County local surcharge and a new 2% surtax for high earners. Before you list, know your adjusted cost basis: it’s the single most important number in your tax calculation.
Do you owe capital gains tax when selling your home in Bethesda, Maryland?
Most homeowners who sell their primary residence in Bethesda owe nothing in capital gains tax. The federal exclusion shields up to $250,000 of gain for single filers and $500,000 for married couples filing jointly—provided you’ve owned and lived in the home for at least two of the last five years. If your gain falls below that threshold, you’re clear. If it exceeds it—increasingly common in Bethesda’s $1M+ market—Maryland taxes the excess as ordinary income, with state rates up to 6.5% plus a Montgomery County local surcharge of up to 3.2%, and a new 2% surtax for high-income filers starting with tax year 2025.
By Pey Behin | May 7, 2026
Here’s the number most homeowners don’t realize: if you’ve lived in your Bethesda home for at least two years and your profit is under $500,000 (married) or $250,000 (single), you owe zero federal capital gains tax on the sale. Nothing withheld, nothing owed, nothing filed beyond your regular return.
That’s the IRS primary residence exclusion, and it was designed exactly for this situation.
To qualify, you need to meet two tests:
- You owned the home for at least 24 of the last 60 months
- You used it as your primary residence for at least 24 of the last 60 months
These 24 months don’t have to be consecutive, and the clock can overlap. If you and your spouse both qualify, you can exclude up to $500,000 of gain from federal taxes.
For most people selling a home they’ve lived in for years, the exclusion covers the full gain. But in Bethesda—where median sale prices have crossed $1.2 million and homes bought in the 1990s have appreciated by several hundred thousand dollars—a growing number of sellers are pushing past that threshold.
When the Exclusion Runs Out
Let’s say you bought in Chevy Chase in 2001 for $550,000 and you’re selling today for $1.4 million. Your raw gain is $850,000. As a married couple, you’re excluded on the first $500,000. That leaves $350,000 in taxable capital gain.
Here’s where Maryland gets specific.
Unlike the federal government—which taxes long-term capital gains at preferential rates of 0%, 15%, or 20% depending on income—Maryland does not distinguish between capital gains and ordinary income. Your taxable gain is stacked on top of your other income and taxed at your marginal Maryland income tax bracket.
Maryland’s state income tax rates range from 2.25% to 6.5% (the top bracket increased as part of 2025 legislative changes). Montgomery County adds a local income tax surcharge of up to 3.2% on top of that. So at the high end, you’re looking at a combined Maryland state + Montgomery County rate approaching 9% to 10% on your taxable gain.
Then there’s the new piece that trips up a lot of sellers: starting with tax year 2025, Maryland added a 2% surtax on capital gains for high-income filers. If your adjusted gross income (AGI) exceeds $350,000—and you sell a home at a significant gain—that 2% applies to the net capital gain on top of your regular Maryland rate.
For a Bethesda household with dual incomes and a $350,000 taxable gain, this isn’t a rounding error. It’s a real number that changes your net proceeds calculation. On $350,000 of gain, an extra 2% is an additional $7,000 owed to Maryland.
This doesn’t mean you shouldn’t sell. It means you should run the numbers before you decide—and that’s a conversation for both your agent and your CPA.
Your Gain Isn’t Just the Selling Price Minus What You Paid
This is the part most sellers miss—and where real money is left on the table.
Your taxable gain is calculated as:
Sale Price − (Adjusted Cost Basis + Selling Costs) = Taxable Gain
Your adjusted cost basis is your original purchase price plus any capital improvements you’ve made over the years. Replacing the roof, adding a deck, finishing the basement, upgrading the kitchen, installing a new HVAC system—these all increase your cost basis, which directly reduces your taxable gain.
What doesn’t count: routine maintenance, repairs, painting, and landscaping upkeep. Those are operating expenses, not capital improvements.
If you’ve owned your North Bethesda or Potomac home for 20+ years and spent $150,000 on renovations, that’s $150,000 less in taxable gain. On a $350,000 taxable gain, that documentation could reduce your Maryland tax exposure by $12,000 or more.
Start gathering records of major improvements now, before you list. Contractor invoices, permits, and receipts from years ago are worth real money at tax time. Your accountant will want the documentation—but you have to find it first.
Selling costs also work in your favor: agent commissions, Maryland transfer taxes, settlement fees, and certain closing costs paid at settlement are generally deductible from your proceeds when calculating your gain. For a full breakdown of what sellers typically pay at closing in Bethesda, see this detailed breakdown of seller closing costs.
The Three Situations Where You Do Pay
1. Your gain exceeds the $500,000 exclusion. This is increasingly common in Bethesda, Potomac, and Chevy Chase. Long-tenure homeowners who bought in the 1990s or early 2000s—when prices were a fraction of today’s—often have gains well above the threshold. If you’ve owned your home for 20–30 years and it’s appreciated significantly, you need to do this math before you list.
2. You don’t meet the ownership or use test. If you’ve owned the home for less than two years, or haven’t used it as your primary residence for at least two of the last five years (perhaps you rented it out, relocated for work, or moved to provide care for a family member), you lose the full exclusion. A partial exclusion may apply if the sale was triggered by a job change, health issue, or certain other qualifying events—but it’s fact-specific and requires professional guidance.
3. You’re selling an investment property or second home. The exclusion applies only to your primary residence. If you’re selling a rental property in Bethesda, a second home in Montgomery County, or any property that wasn’t your primary residence, the gain is fully taxable at the federal and Maryland levels.
If you’re thinking through whether to sell your Bethesda home—or trying to decide whether now is the right time relative to a future purchase—here’s a guide on sequencing the sell and buy decision.
A Note on Maryland Nonresident Withholding
This one catches sellers off guard, particularly those who’ve relocated out of Maryland but still own property here.
Under Maryland law, if a seller is not a Maryland resident at the time of closing, the settlement agent is required to withhold 7.5% of the net sales proceeds and remit it to the state. This isn’t an additional tax—it’s an advance payment against any Maryland taxes you might owe on the gain. But it ties up real money at closing, often tens of thousands of dollars.
The good news: if you meet the federal exclusion requirements and your Maryland tax bill would be zero (or minimal), you can file Form MW506AE with the Maryland Comptroller at least 21 days before your closing to apply for a full or partial exemption from withholding. This is something your agent and settlement company should flag well in advance if it applies to your situation.
What to Do Before You List
Capital gains tax isn’t usually a reason not to sell. But it is a reason to plan ahead, especially in a market like Bethesda where home values have run dramatically higher over the past two decades.
Before you list:
- Calculate your adjusted cost basis: original purchase price + documented capital improvements
- Estimate your gross gain: expected sale price minus adjusted cost basis and selling costs
- Check the exclusion: does your gain fall within $500,000 (married) or $250,000 (single)?
- Talk to your CPA: if your gain may exceed the exclusion, understand your Maryland exposure—including the 2% surtax if your household AGI is above $350,000
- Flag nonresident withholding early: if you’ve relocated out of Maryland, apply for a withholding exemption well before settlement
Your agent can tell you what you’re likely to net after commissions, Maryland transfer taxes, and settlement costs. Your CPA handles the tax projection. The two conversations together give you the complete picture before you commit to listing.
Every situation is different. The only way to know your actual tax exposure is to run the numbers with both professionals. If you want to start with the real estate side—a realistic net proceeds estimate for your Bethesda or Montgomery County home—I’m happy to walk through that with you before anything else.
Frequently Asked Questions
Do most Bethesda home sellers pay capital gains tax?
No—most primary residence sellers don’t. The federal exclusion shields up to $250,000 for single filers and $500,000 for married couples filing jointly, and most Bethesda homeowners who’ve lived in their home for at least two years fall within that limit. The sellers who face a tax bill are typically long-tenure owners with very large gains, those who didn’t meet the residency test, or investors selling non-primary properties.
Does Maryland have a lower capital gains tax rate than the federal rate?
No—Maryland taxes capital gains as ordinary income, not at a preferential rate. Unlike the federal system (which caps long-term capital gains at 15% or 20% for most filers), Maryland layers your gain on top of your regular income and taxes it at your marginal bracket, currently ranging from 2.25% to 6.5% at the state level, plus up to 3.2% in Montgomery County local taxes. This is a meaningful difference from how most sellers assume it works.
What is Maryland’s 2% capital gains surtax, and does it apply to me?
Maryland added a 2% surtax on capital gains starting with tax year 2025 for filers with adjusted gross income (AGI) exceeding $350,000. If you’re a high-income household and your home sale results in a taxable gain above the federal exclusion, this 2% applies to the net capital gain on top of your regular Maryland rate. Many Bethesda dual-income households selling at a significant gain will need to factor this in when calculating their actual net proceeds.
What counts as a capital improvement for calculating my home’s cost basis?
Capital improvements are significant upgrades that add value or extend the useful life of your property—things like kitchen remodels, bathroom additions, roof replacements, HVAC replacements, new decks, and finished basements. Routine maintenance and repairs (painting, fixing leaks, landscaping upkeep) don’t count. The more improvements you can document with receipts and permits, the higher your cost basis—and the lower your taxable gain.
What is the Maryland nonresident withholding rule, and does it affect me?
If you’re selling a Maryland property but are no longer a Maryland resident at closing, the settlement agent must withhold 7.5% of your net sale proceeds and send it to the state as an advance against potential taxes. If your gain falls within the federal exclusion, you can file Form MW506AE with the Maryland Comptroller at least 21 days before closing to request a full exemption from this withholding. This is not something to discover the week before settlement—flag it with your agent and settlement company early.
Most sellers in Bethesda walk away from their sale without owing a dollar in capital gains tax. But the ones who find out they have a tax bill at closing—rather than before listing—are the ones who didn’t run the numbers first.
If you’re thinking about selling your Bethesda or Montgomery County home and want to understand what you’ll actually net—before and after any tax considerations—reach out. I’ll walk you through the real estate side of the calculation, and we’ll make sure you’re talking to the right accountant before you go to market.
About Pey Behin
Pey Behin is a residential real estate agent serving the Washington, DC metro area, with a focus on Bethesda, Montgomery County, and Northern Virginia. He works with buyers and sellers who want clear strategy, data-driven pricing, and direct guidance throughout the transaction process. His approach combines market analytics, negotiation expertise, and modern marketing to position clients effectively in competitive conditions.
