The Delaware capital gains tax on real estate has two layers: the IRS taxes long-term gains at 0%, 15%, or 20% depending on your income, and Delaware folds the same gain into your state taxable income at graduated rates topping out at 6.6%. Nonresidents also face mandatory withholding at closing, and a 4% real estate transfer tax further trims what you walk away with. The good news is that most people selling a primary residence eliminate the federal and state income tax on the sale entirely through the Section 121 exclusion.
Federal Rate on Your Gain
If you owned the property for more than a year, your profit is a long-term capital gain and gets preferential rates. Held for a year or less, it’s short-term and taxed at your ordinary income rate.1Internal Revenue Service. Topic No. 409 Capital Gains and Losses
For 2026, single filers pay:
- 0% on taxable income up to $49,450
- 15% on income from $49,451 to $545,500
- 20% on income above $545,500
Married couples filing jointly get the 0% rate up to $98,900, 15% up to $613,700, and 20% above that. Most sellers whose gain isn’t fully sheltered by the home-sale exclusion end up in the 15% band.
The 3.8% Surtax on High Earners
The Net Investment Income Tax adds 3.8% on top of the capital gains rate when your modified adjusted gross income crosses $200,000 (single) or $250,000 (married filing jointly).2Internal Revenue Service. Topic No. 559 Net Investment Income Tax Those thresholds aren’t indexed for inflation. A large real estate gain can push you over the line for that year even if your salary alone wouldn’t.
Depreciation Recapture on Rentals
If the property was a rental or other investment real estate and you claimed depreciation, the IRS taxes the portion of your gain tied to that depreciation at up to 25%, no matter your income bracket.1Internal Revenue Service. Topic No. 409 Capital Gains and Losses Even if you never actually claimed the deductions, the IRS treats you as though you did. Any gain above the depreciation amount then falls back to the ordinary long-term rate.
Delaware’s State Income Tax on the Gain
Delaware has no separate capital gains rate. The gain becomes part of your taxable income and is taxed on the state’s graduated schedule, which tops out at 6.6% on income over $60,000.3Delaware Code Online. Delaware Code Title 30 Chapter 11 Subchapter I Because a real estate gain usually pushes total income well past that threshold, most of the profit ends up at the top rate.
The full brackets:
- 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
Gains from Delaware real estate count as Delaware-source income for both residents and nonresidents, so a nonresident owner can’t sidestep the state tax by living elsewhere.4Delaware Code Online. Delaware Code Title 30 Chapter 11 Subchapter III Nonresident Individuals C-corporations selling Delaware real estate pay the state’s flat 8.7% corporate income tax on the gain.
Figuring Out the Taxable Gain
Your taxable gain is the sale price minus your adjusted basis. Basis starts with what you paid for the property, goes up for capital improvements, and goes down for depreciation you claimed.5Internal Revenue Service. Topic No. 703 Basis of Assets
Capital improvements are additions that extend the property’s life or add value, like a new roof, a kitchen renovation, or a finished basement. Routine repairs and maintenance don’t count. Spend $15,000 on a new HVAC system and your basis rises by $15,000. Spend $500 fixing a leaky pipe and it doesn’t move.
Selling expenses also come off the top. Agent commissions, title insurance, transfer taxes, legal fees, and recording costs all reduce the sale price used to compute your profit. Keep every closing statement and receipt. The IRS puts the burden of proof on you, and reconstructing basis years later is painful.6Internal Revenue Service. Publication 551 Basis of Assets
The Primary Residence Exclusion
Section 121 lets you exclude up to $250,000 of gain on the sale of your main home, or up to $500,000 for a married couple filing jointly.7Office of the Law Revision Counsel. 26 USC 121 Exclusion of Gain From Sale of Principal Residence For most homeowners in Delaware, this exclusion erases the entire federal and state income tax bill on the sale.
To qualify, you must meet both tests:
- Ownership: you owned the home at least two of the five years before the sale.
- Use: you used it as your principal residence at least two of those same five years. The two years don’t have to 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 sale in the past two years. The exclusion doesn’t cover investment property, second homes, or a home you haven’t lived in long enough.
1031 Exchange for Investment Property
If the property is investment or business real estate rather than a personal home, a 1031 exchange defers the whole capital gains tax when you roll the proceeds into another qualifying property. The replacement has to be held for business or investment use too. You can’t swap a rental for a vacation house you’ll use yourself.8Office of the Law Revision Counsel. 26 USC 1031 Exchange of Real Property Held for Productive Use or Investment
The deadlines are strict:
- 45 days from closing to identify potential replacement properties in writing.
- 180 days from closing (or the due date of your return, whichever is earlier) to actually receive the replacement.
You also can’t touch the sale proceeds. A qualified intermediary holds the funds between transactions. Miss a deadline or take the money into your own account and the deferral collapses. Delaware follows the federal treatment, so a valid 1031 defers state tax too.
Nonresident Withholding at Closing
Nonresidents selling Delaware real estate face mandatory withholding when the deed is recorded. Every seller files Form REW-EST (formerly Form 5403) with the Delaware Division of Revenue at recording.9Delaware Division of Revenue. Form REW-EST Real Estate Tax Return Declaration of Estimated Income Tax If a nonresident doesn’t complete the estimated tax calculation on the form, the settlement agent withholds 6.6% of net proceeds for individuals and pass-through entities, or 8.7% for C-corporations, and sends it directly to the state.
You can check a box on the form and skip the estimated payment if:
- You’re a Delaware resident individual, pass-through entity, or corporation.
- The sale is exempt from capital gain recognition, such as a 1031 exchange.
- The gain qualifies for a full exclusion, such as the primary residence exclusion.
- The transfer results from a foreclosure.
Installment sellers can defer the withholding but must report and remit as they recognize each installment.10Delaware Division of Revenue. Form 5403 Real Estate Tax Return Declaration of Estimated Income Tax Whatever gets withheld at closing counts as a credit against the tax you owe when you file your annual return.
Estimated Tax Payments and Penalties
A big gain can trigger an estimated tax obligation to Delaware. Any individual, resident or nonresident, expecting to owe more than $800 in Delaware income tax beyond amounts already withheld must file a declaration of estimated tax.11Delaware Division of Revenue. Declaration of Estimated Income Tax for Individuals
Underpayment brings a 1.5% penalty per month on the shortfall. You avoid it if your estimated payments cover at least 90% of the current year’s liability or 100% of last year’s tax (110% if your federal AGI exceeded $150,000 the prior year). If your Delaware liability last year was zero and it was a full 12-month tax year, no estimated payment is required. Delaware can waive the penalty for casualty, disaster, or other unusual circumstances.
The 4% Transfer Tax
Separate from the income tax on your gain, Delaware charges a real estate transfer tax on every property sale. The base state rate is 3%, dropping to 2.5% in any municipality or county that levies the full 1.5% local transfer tax, which covers nearly all of Delaware. The combined rate in most transactions is 4% of fair market value, split evenly between buyer and seller.12Delaware Code Online. Delaware Code Title 30 Chapter 54 Subchapter I Realty Transfer Tax On a $400,000 sale that’s $16,000 total, $8,000 from each side, though the split can be renegotiated in the purchase agreement.
The transfer tax counts as a selling expense when you calculate your capital gain, so it reduces the taxable profit on top of reducing your net proceeds.
Several transfers are exempt entirely, including transfers between spouses, between parents and children, to or from government entities, foreclosure transfers to a lender, and transfers under wills or transfer-on-death deeds.
First-time homebuyers get a break on their share: the buyer’s state portion drops by 0.5%, applied to the first $400,000 of value and capped at $2,000 in savings. To qualify, the buyer must never have held a direct legal interest in residential real estate and must intend to occupy the home as a principal residence within 90 days of closing.13Delaware Division of Revenue. First-Time Home Buyer Tax Credit The closing attorney applies the reduced rate automatically for qualifying buyers.
Filing After the Sale
Federally, capital gains go on Schedule D of Form 1040, which captures purchase price, sale price, and basis adjustments for each property.14Internal Revenue Service. About Schedule D Form 1040 If the full primary residence exclusion wipes out the gain, you generally don’t need to report the sale federally. You still report it on your Delaware return.
Delaware residents file Form 200, which includes capital gains in total taxable income. Nonresidents file Form 200-02, reporting only Delaware-source income, which includes gain from selling Delaware real estate. Any withholding collected on Form REW-EST at closing is credited against the tax due on the annual return. Pass-through entities like LLCs and partnerships pass gains through to their owners, who report them on individual returns; C-corporations report on the Delaware corporate income tax return.