Delaware Capital Gains Tax on Real Estate: Rates, Withholding, and Exclusions

Selling real estate in Delaware triggers capital gains tax at two levels. The federal government taxes long-term gains at 0%, 15%, or 20% depending on your income, with a possible 3.8% surtax and up to 25% on recaptured depreciation. Delaware adds its own income tax on the same gain at graduated rates topping out at 6.6%. If you don’t live in Delaware, the state collects its share through mandatory withholding at closing. The Delaware capital gains tax on real estate hits hardest on investment property and second homes; sellers of a primary residence often owe nothing after the federal exclusion.

Federal Capital Gains Rates on a Property Sale

How long you owned the property determines which federal rate applies. Hold for one year or less and the gain is short-term, taxed at your ordinary income rate. Hold for more than one year and the gain is long-term, taxed at preferential rates.¹

For 2026, long-term rates for single filers run:

0% on taxable income up to $49,450
15% from $49,451 to $545,500
20% above $545,500

Married couples filing jointly get the 0% rate up to $98,900, 15% through $613,700, and 20% beyond. A seller with any meaningful salary who takes a gain on a Delaware property usually lands in the 15% bracket.

Net Investment Income Tax

Higher earners owe an extra 3.8% on net investment income, which includes real estate gains. The surtax kicks in when modified adjusted gross income passes $200,000 for single filers or $250,000 for joint filers.² Those thresholds aren’t indexed, so the gain itself can push you over even if your paycheck doesn’t.

Depreciation Recapture

If the property was a rental, the IRS taxes the portion of your gain attributable to depreciation at a maximum of 25%, no matter your bracket.¹ This applies whether or not you actually claimed the deductions in prior years; the IRS treats you as though you did. Gain above the recapture amount gets the standard long-term rate.

How Delaware Taxes the Gain

Delaware has no separate capital gains rate. The gain flows into your taxable income and gets taxed at the state’s graduated brackets, which top out at 6.6% on income above $60,000.³ Because any sizable property gain pushes the seller past $60,000, most of the gain ends up at the top rate.

The full schedule:

0% on the first $2,000
2.2% from $2,001 to $5,000
3.9% from $5,001 to $10,000
4.8% from $10,001 to $20,000
5.2% from $20,001 to $25,000
5.55% from $25,001 to $60,000
6.6% above $60,000

Delaware source rules reach nonresidents too. Gain from the sale of real estate physically located in Delaware is Delaware-source income regardless of where the seller lives.⁴ C-corporations selling Delaware real estate pay the state’s flat 8.7% corporate income tax on the gain.

Figuring the Taxable Gain

Taxable gain is sale price minus adjusted basis. Adjusted basis starts with what you paid for the property, climbs with capital improvements, and falls with any depreciation claimed.⁵

Capital improvements are things that add value or extend the property’s life. A new roof, a kitchen renovation, a finished basement. Routine repairs don’t count. Replace a $15,000 HVAC system and your basis goes up by $15,000. Patch a leak for $500 and nothing changes.

Selling costs come off the sale price. Agent commissions, title insurance, legal fees, recording charges, and the transfer tax all reduce the gain. The IRS puts the burden of proof on you for every one of these numbers, so hold onto closing statements and receipts.⁶

The Primary Residence Exclusion

The federal Section 121 exclusion is the biggest break available to Delaware home sellers. A single filer can exclude up to $250,000 of gain on a main home; married couples filing jointly can exclude up to $500,000.⁷

Two tests have to be met:

You owned the home for at least two of the five years before the sale.
You used it as your principal residence for at least two of those five years. The two years need not be consecutive.

For the $500,000 joint exclusion, both spouses must meet the use test, at least one must meet the ownership test, and neither can have used the exclusion on another home within the past two years. Because Delaware builds taxable income off the federal number, excluded gain also escapes state tax. For most owner-occupants, the exclusion erases the entire tax on the sale. It doesn’t help with rentals, second homes, or anyone who hasn’t lived in the house long enough.

Deferring Tax With a 1031 Exchange

If the property is held for business or investment rather than personal use, a 1031 exchange defers both federal and Delaware tax on the gain. You roll the proceeds into another qualifying property; the replacement must also be held for business or investment.⁸

The deadlines are strict:

You must identify potential replacement properties in writing within 45 days of closing on the sold property.
You must receive the replacement property within 180 days of the sale, or by the due date of that year’s tax return, whichever comes first.

You can’t touch the sale proceeds in between. A qualified intermediary has to hold the funds. Miss a deadline or take the money and the deferral collapses.

Withholding at Closing for Nonresidents

If you’re a nonresident, Delaware collects its tax up front. Every seller files Form REW-EST (formerly Form 5403) with the Division of Revenue when the deed is recorded.⁹ If a nonresident seller doesn’t complete the estimated tax calculation on the form, the settlement agent withholds 6.6% of the net proceeds for individuals and pass-through entities, or 8.7% for C-corporations, and sends it straight to the state.

Several boxes on the form eliminate the withholding:

You’re a Delaware resident individual, pass-through entity, or corporation.
The sale is exempt from gain recognition, such as a 1031 exchange.
The gain qualifies for a full exclusion, such as the primary residence exclusion.
The transfer results from foreclosure.

Installment sellers can defer the withholding but must report and remit as each installment is recognized.¹⁰ Whatever gets withheld counts as a credit when you file your Delaware return the following spring.

Estimated Tax and Underpayment Penalties

A big gain often creates an estimated tax obligation. Any individual, resident or nonresident, expecting to owe more than $800 in Delaware income tax beyond what has been withheld must file a declaration of estimated tax.¹¹

Underpayment carries a 1.5% monthly penalty on the shortfall. You avoid it by paying at least 90% of the current year’s tax or 100% of the prior year’s (110% if your federal AGI topped $150,000 the year before). No estimated payment is required if your prior-year Delaware liability was zero over a full 12-month tax year. Delaware can waive the penalty for casualty, disaster, or other unusual circumstances.

Realty Transfer Tax

Separate from income tax, Delaware charges a real estate transfer tax on every sale. The base state rate is 3%, dropping to 2.5% in any municipality or county that has enacted the full 1.5% local transfer tax. Nearly all of Delaware has, so most transactions carry a combined 4% rate on fair market value, split equally between buyer and seller.¹² On a $400,000 sale that’s $16,000 total, $8,000 per side, though the purchase agreement can renegotiate the split.

Common exempt transfers include those between spouses, between parent and child or a child’s spouse, to or from government entities, foreclosure transfers to a defaulted lender, and transfers through wills or transfer-on-death deeds.

The seller’s share of the transfer tax is a selling expense and reduces the taxable gain.

How and Where to Report the Sale

Federal reporting goes on Schedule D of Form 1040, which captures purchase price, sale price, and basis for each property sold.¹³ If the full primary residence exclusion wipes out your federal tax, you generally don’t need to report the sale on your federal return at all. You still report the gain to Delaware.

Delaware residents use Form 200. Nonresidents use Form 200-02 to report Delaware-source income, which includes the gain on Delaware real estate.⁴ Any amount withheld through Form REW-EST at closing is credited against the final tax when you file. Corporations report on their Delaware corporate return; LLCs and partnerships pass the gain through to the owners.

1
Internal Revenue Service. Topic No. 409 Capital Gains and Losses
2
Internal Revenue Service. Topic No. 559 Net Investment Income Tax
3
Delaware Code Online. Delaware Code Title 30 Chapter 11 Subchapter I
4
Delaware Code Online. Delaware Code Title 30 Chapter 11 Subchapter III Nonresident Individuals
5
Internal Revenue Service. Topic No. 703 Basis of Assets
6
Internal Revenue Service. Publication 551 Basis of Assets
7
Office of the Law Revision Counsel. 26 USC 121 Exclusion of Gain From Sale of Principal Residence
8
Office of the Law Revision Counsel. 26 USC 1031 Exchange of Real Property Held for Productive Use or Investment
9
Delaware Division of Revenue. Form REW-EST Real Estate Tax Return Declaration of Estimated Income Tax
10
Delaware Division of Revenue. Form 5403 Real Estate Tax Return Declaration of Estimated Income Tax
11
Delaware Division of Revenue. Declaration of Estimated Income Tax for Individuals
12
Delaware Code Online. Delaware Code Title 30 Chapter 54 Subchapter I Realty Transfer Tax
13
Internal Revenue Service. About Schedule D Form 1040