1031 exchanges in Washington
A lot of what is written about Washington 1031 exchanges is simply wrong. Here is what actually applies, including the tax an exchange never defers.
The short answer
Washington has no personal income tax, and real estate is statutorily exempt from the Washington capital gains excise tax. So unlike California or Oregon, a 1031 exchange here defers no state income tax, because there is none to defer.
That does not make an exchange pointless. The federal bill on a long-held rental still commonly runs 20 to 28 percent of the sale price, and that is fully deferrable. But be clear about what does not move: REET is never deferred by a 1031 exchange. You pay it in full on the sale, and on many Washington sales it is the largest immediate cost of the transaction.
Key facts at a glance
- State income tax
- None
- Capital gains excise tax on real estate
- Exempt, under RCW 82.87.050(1)
- What a 1031 defers here
- Federal capital gains, depreciation recapture, and NIIT only
- REET
- 1.10 to 3.00 percent state, graduated, plus local. Not deferred by an exchange
- Nonresident seller withholding
- None. Washington has no income tax to withhold against
- Clawback
- None
- QI regulation
- Yes, chapter 19.310 RCW. $1M bond or segregated escrow, plus $250k E&O
- Required filing
- REET affidavit, REV 84-0001a, with the county treasurer
On this page
The myth worth correcting first
Several widely read 1031 websites state that Washington imposes a 7 percent capital gains tax on the sale of real estate, and that a 1031 exchange is needed to avoid it. That is incorrect.
Washington's capital gains excise tax, enacted in 2021 and expanded in 2025 to add a second tier, applies to long-term capital gains above a standard deduction. But RCW 82.87.050(1) exempts real estate outright — "all real estate transferred by deed, real estate contract, judgment, or other lawful instruments that transfer title to real property and are filed as a public record with the counties where real property is located."
Selling a Washington rental owes zero Washington capital gains excise tax whether you exchange or not. Anyone telling you otherwise is either careless or selling something.
If you sell an interest in a privately held entity rather than the property itself, the exemption reaches only the portion of gain directly attributable to real estate the entity owns directly, measured as fair market value less basis of that real estate times the percentage sold. Any non-real-estate value inside the entity remains subject to the excise tax. Entity-level sales are also caught by the controlling-interest REET rules, so the entity route is not the workaround it appears to be.
So is an exchange worth doing here?
Frequently, yes. The absence of state tax lowers the stakes relative to California, but the federal side is still large.
| Line | Seattle rental example |
|---|---|
| Purchase price, 1994 | $140,000 |
| Sale price today | $1,100,000 |
| Selling costs at 6 percent | ($66,000) |
| Depreciation taken, ~27.5 years | ($112,000) |
| Adjusted basis | $28,000 |
| Total taxable gain | $1,006,000 |
| Depreciation recapture, $112,000 at 25% | $28,000 |
| Federal capital gains, $894,000 at 20% | $178,800 |
| Net investment income tax, 3.8% | $38,228 |
| Washington income tax | $0 |
| Total tax | $245,028, about 22% of the sale price |
Twenty-two percent is meaningfully better than the 34 percent a comparable California owner faces, and it is still a quarter of a million dollars. The federal deferral is the whole case in Washington, and it is usually enough of one.
Illustration using top-bracket assumptions. Run your own numbers →
REET, the tax a 1031 does not touch
This is where Washington owners get surprised, and it is worth understanding before you plan around it.
The real estate excise tax is charged on the conveyance, based on the selling price, and is normally paid by the seller. It is not a tax on gain, so deferring gain has no effect on it. State graduated rates currently in effect through December 31, 2026:
| Portion of selling price | State rate |
|---|---|
| Up to $525,000 | 1.10% |
| $525,001 to $1,525,000 | 1.28% |
| $1,525,001 to $3,025,000 | 2.75% |
| Above $3,025,000 | 3.00% |
| Classified agricultural and timberland | Flat 1.28% |
Local REET is added on top, commonly 0.25 or 0.50 percent depending on the city and county, so combined top-tier rates frequently reach around 3.5 percent. Check the rate for the specific jurisdiction rather than assuming.
WAC 458-61A-213 is narrow and is often misread as an exemption. It states plainly that acquisition of property by an exchange facilitator in connection with a 1031 exchange is subject to REET. The later transfer from the facilitator to complete the exchange is exempt only if the proper tax was already paid on the initial transaction and a signed supplemental statement, form REV 84-0002ea, is attached to the affidavit.
In other words, it prevents REET being charged twice. It does not prevent it being charged once. In a modern direct-deed exchange where the intermediary never takes title, you simply pay REET on the sale as normal, and the rule never comes up.
On the $1.1 million example above, REET runs roughly $13,000 to $14,000 before local add-ons. That is real money that leaves the transaction regardless of how well the exchange is executed, and it should be in your net-proceeds math from the start.
Washington actually regulates intermediaries
Most states do not regulate qualified intermediaries at all. Washington does, under chapter 19.310 RCW, and the requirements are among the stronger ones in the country.
- Financial assurance. A facilitator must maintain a fidelity bond of at least $1 million, or hold all exchange funds in a qualified escrow or trust account that requires your written authorization for withdrawals.
- Errors and omissions coverage of at least $250,000, or an equivalent deposit.
- No commingling of exchange funds with operating funds, and no lending or transferring client funds to affiliates.
- Change of control notice to all clients within 10 business days, plus a website notice for 90 days.
- Violations are enforceable as Consumer Protection Act violations.
Note what this is not: there is no license and no registry. Nobody vets a facilitator before they open for business. The statute sets conduct and financial standards that are enforced after the fact. That is better than nothing and is not a substitute for your own diligence.
Eleven questions to ask any intermediary →
The real Washington planning trap
Washington owners tend to worry about the wrong direction. There is no clawback here, because there is no state income tax to claw back. The risk runs the other way.
If you exchange a Washington rental into property in Oregon, California, or Idaho, you acquire that state's filing obligation and, on the eventual taxable sale, that state's income tax on the gain sourced there. Because Washington has no income tax, you get no credit to offset it — there is nothing to credit against.
A Washington resident who exchanges into a Portland apartment building has quietly signed up for Oregon income tax on the eventual disposition, and possibly Oregon's own annual tracking obligation if that property is later exchanged out of state. Same for California, with its permanent clawback.
None of that is a reason to avoid out-of-state replacement property. It is a reason to know which state you are moving into, and to weight tax-free states or diversified DST portfolios accordingly when the underlying economics are otherwise similar.
Your Washington checklist
- Ignore anything claiming the 7 percent capital gains tax applies. Real estate is exempt.
- Budget REET into your net proceeds. It is 1.1 to 3.0 percent state plus local, it is due at the sale, and the exchange does not defer it.
- Engage an intermediary before closing. Ask specifically whether they meet the chapter 19.310 RCW standards and how funds are held.
- File the REET affidavit, REV 84-0001a, with the county treasurer. Every transfer requires one, including exempt ones.
- Think carefully about the destination state. Exchanging into an income-tax state is a one-way decision with no Washington credit available.
- Watch the late-year trap. A fall sale means your April filing deadline can arrive before day 180. File an extension.
Bottom line for Washington owners
The state gives you a genuine head start. Your all-in tax on a rental sale is roughly a fifth to a quarter of the price rather than the third a California owner faces, and there is no clawback and no perpetual filing.
What remains is a large federal bill that a 1031 exchange defers completely, and a REET charge that it does not defer at all. Plan around both.
Selling a Washington rental?
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