1031 Exchange in Washington
Washington has no state income tax, so a 1031 exchange in Washington only needs to defer federal capital gains tax. Washington does impose a capital gains excise tax (7%, plus a 2.9% surtax on gains over $1 million beginning in 2025), but gains from the sale of real estate are fully exempt from that tax under RCW 82.87.050. Two state-specific rules still matter for exchangers: the Exchange Facilitators Act (Chapter 19.310 RCW) sets bonding, insurance, and fund-handling duties for qualified intermediaries, and Washington's real estate excise tax (REET) applies to the sale even in a 1031 exchange, with an affidavit required for each transfer.
Fast Facts
- State Income Tax Rate
- None. Washington has no state income tax, so investors only defer federal capital gains taxes. Washington's separate capital gains excise tax (7%, plus a 2.9% surtax on gains over $1 million since 2025) exempts all gains from real estate sales under RCW 82.87.050.
- Conforms to Federal 1031
- Not applicable at the income-tax level, since Washington has no state income tax. Federal rules under IRC Section 1031 govern the exchange. Washington does regulate exchange facilitators under Chapter 19.310 RCW.
- QI Requirements
- Under Chapter 19.310 RCW, exchange facilitators must maintain a fidelity bond of at least $1 million (or hold all client funds in qualified escrow or trust accounts) and errors and omissions insurance of at least $250,000 (or an equivalent deposit). Washington does not license or register qualified intermediaries.
- Fund Handling
- Exchange funds must be held in a separately identified account and invested to provide liquidity and preserve principal, with withdrawals requiring independent authorization (RCW 19.310).
- Real Estate Excise Tax (REET)
- Graduated state rates from 1.1% to 3.0% of the selling price (plus local REET). A 1031 exchange does not defer REET: the acquisition of property by an exchange facilitator is subject to REET, and an affidavit is required for each transfer (WAC 458-61A-213).
Legislative Updates
Exchange Facilitator Regulations (Chapter 19.310 RCW)
Washington's Exchange Facilitators Act requires qualified intermediaries to maintain a fidelity bond of at least $1 million (or hold client funds in qualified escrow or trust accounts), carry errors and omissions insurance of at least $250,000 (or an equivalent deposit), and hold exchange funds in a manner that provides liquidity and preserves principal.
Capital Gains Excise Tax: Real Estate Exempt
Washington's capital gains excise tax (RCW 82.87) is 7% on long-term gains above the standard deduction, with an additional 2.9% on gains over $1 million effective January 1, 2025. All gains from the sale of real estate are exempt, so this tax does not apply to real property 1031 exchanges.
REET Affidavit Requirements for 1031 Exchanges
Washington requires a real estate excise tax affidavit for each transfer in a Section 1031 tax-deferred exchange, including transfers to and from an exchange facilitator (WAC 458-61A-213). REET itself is not deferred by a 1031 exchange.
Legal and Tax Considerations
State Income Tax Rate
None. Washington has no state income tax. Its capital gains excise tax (7%, plus 2.9% on gains over $1 million since 2025) exempts real estate sales entirely (RCW 82.87.050), so only federal capital gains tax is deferred in a Washington 1031 exchange.
Conforms to Federal 1031
Not applicable at the income-tax level; federal rules under IRC Section 1031 govern. Washington separately regulates exchange facilitators under Chapter 19.310 RCW.
QI Requirements
Fidelity bond of at least $1 million (or qualified escrow/trust accounts for all client funds) and errors and omissions insurance of at least $250,000 (or equivalent deposit) under Chapter 19.310 RCW. There is no state registration or licensing regime for qualified intermediaries.
Fund Handling
Exchange funds must be held in a separately identified account and invested to maintain liquidity and preserve principal, with independent authorization required for withdrawals (RCW 19.310).
Real Estate Excise Tax
Graduated state rates: 1.1% up to $525,000; 1.28% to $1,525,000; 2.75% to $3,025,000; 3.0% above that (plus local REET). REET applies to the sale even in a 1031 exchange; the later transfer from the facilitator to the exchanger can be exempt if REET was properly paid on the first leg (WAC 458-61A-213).
Required Documentation
- Federal Form 8824
- Real Estate Excise Tax Affidavit (for each transfer, including to/from the exchange facilitator)
Clawback Rule
None
Step-by-Step Process
- 1
Identify Replacement Property
You must identify potential replacement properties within 45 days of selling your relinquished property. In Washington, consider property tax implications and local zoning regulations when identifying properties.
- 2
Engage a Qualified Intermediary
Work with a qualified intermediary who meets Washington's Exchange Facilitators Act requirements under Chapter 19.310 RCW, including a fidelity bond of at least $1 million (or qualified escrow/trust accounts) and errors and omissions insurance of at least $250,000.
- 3
Close on Replacement Property
Complete the purchase of your replacement property within 180 days of selling your relinquished property (or by your tax return due date, if earlier).
- 4
File Tax Returns
Report your 1031 exchange on your federal tax return using Form 8824. Since Washington has no state income tax, there is no state return on which to report the exchange.
- 5
Real Estate Excise Tax Affidavit
Washington requires a real estate excise tax affidavit for each transfer in a Section 1031 tax-deferred exchange, including the transfers to and from an exchange facilitator (WAC 458-61A-213). Note that a 1031 exchange does not defer REET on the sale itself.
- 6
Local Regulations
Review local zoning regulations and development codes, which vary between Washington municipalities. Seattle and other major cities often have stricter regulations, while rural areas may have fewer restrictions.
- 7
Environmental Considerations
Washington regulates development near wetlands, shorelines (Shoreline Management Act), and forest lands. When exchanging properties in Washington, review environmental assessments carefully, particularly for properties near water bodies or in designated preservation areas.
Timeline Calculator
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Common Pitfalls
Assuming a 1031 exchange defers Washington's real estate excise tax
Issue
REET is a transfer tax, not an income tax, and it is not deferred by a 1031 exchange. The acquisition of property by an exchange facilitator in connection with a 1031 exchange is subject to REET (WAC 458-61A-213).
Prevention
Budget for state REET of 1.1% to 3.0% of the selling price (plus local REET) on the sale of your relinquished property, and ensure the affidavit and supplemental statement requirements are met so the facilitator-to-exchanger transfer qualifies for exemption.
Underestimating qualified intermediary requirements
Issue
Washington's Exchange Facilitators Act (Chapter 19.310 RCW) requires intermediaries to maintain a fidelity bond of at least $1 million (or hold client funds in qualified escrow or trust accounts), carry errors and omissions insurance of at least $250,000, and hold exchange funds so that liquidity is maintained and principal is preserved.
Prevention
Work with qualified intermediaries who comply with Washington's requirements. Verify their bond and insurance coverage before engaging their services.
Overlooking real estate excise tax affidavit requirements
Issue
Washington requires a real estate excise tax affidavit for each transfer in a Section 1031 tax-deferred exchange, including the transfers to and from an exchange facilitator.
Prevention
Work with real estate professionals and qualified intermediaries who are familiar with Washington's affidavit requirements for 1031 exchanges, including the supplemental statement needed for the exempt leg of the exchange.
Misunderstanding environmental regulations
Issue
Washington regulates property use and development around wetlands, shorelines, and forest lands, which can affect what you can do with a replacement property.
Prevention
Include environmental assessments in your due diligence and work with professionals familiar with Washington's environmental regulations, especially for waterfront or rural land.
Frequently Asked Questions
Does Washington have any special requirements for 1031 exchanges?
Yes, in two respects. First, Washington’s Exchange Facilitators Act (Chapter 19.310 RCW) requires qualified intermediaries to maintain a fidelity bond of at least $1 million (or hold all client funds in qualified escrow or trust accounts), carry errors and omissions insurance of at least $250,000, and hold exchange funds in a manner that provides liquidity and preserves principal. Washington does not license or register intermediaries, so verifying compliance is up to you. Second, Washington requires a real estate excise tax affidavit for each transfer in a Section 1031 exchange, including transfers to and from an exchange facilitator (WAC 458-61A-213). Since Washington has no state income tax, only federal capital gains taxes are deferred through the exchange.
Can I exchange a property in another state for a property in Washington?
Yes. Section 1031 is a federal provision that allows exchanges across state lines. Investors from states with income taxes (such as California or Oregon) commonly exchange into Washington, though some origin states impose “clawback” rules that tax the deferred gain when the replacement property is eventually sold — check the rules of the state you are exchanging out of.
Does Washington’s capital gains tax apply to my 1031 exchange?
No. Washington’s capital gains excise tax (RCW 82.87) — 7% on long-term gains above the standard deduction, plus an additional 2.9% on gains over $1 million beginning January 1, 2025 — exempts all gains from the sale of real estate under RCW 82.87.050. Real property exchanges are therefore outside this tax regardless of whether you complete a 1031 exchange.
What are the property tax implications of owning investment property in Washington?
Property tax rates in Washington vary by county and municipality; taxes are assessed and collected at the local level, and properties are revalued regularly. Separately, Washington’s graduated real estate excise tax (REET) — state rates from 1.1% to 3.0% based on selling price, plus local REET — applies when you eventually sell your replacement property, and is not deferred by a 1031 exchange.
Major Cities
Seattle, Spokane, Tacoma, Vancouver, Bellevue, Kent, Everett, Renton, Yakima, Federal Way
References
Official References
- Washington State Department of Revenue
- Washington State Department of Revenue - Real Estate Excise Tax
- Washington State Department of Revenue - Capital Gains Tax
- Washington State Legislature - Exchange Facilitators (Chapter 19.310 RCW)
- WAC 458-61A-213 - IRS Tax Deferred Exchange
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.