1031 Exchange Rules in Washington

Last reviewed: June 2026. State rules change. Verify current rules before closing.

What Is Different in Washington

Washington requires some myth-busting. Investors hear that Washington now has a capital gains tax, and they worry it applies to their property sale. It does not. Washington's capital gains excise tax, enacted under RCW 82.87, applies to gains from sales of stocks, bonds, and certain other assets at 7%, with a 9% tier on gains above $1 million starting in 2026. Real estate is statutorily exempt. All real estate, every sale, regardless of price or how long you held it.

So for a direct sale of Washington investment property, there is no state income tax, no state capital gains tax, and no state withholding at closing. Your 1031 exchange analysis in Washington is a federal analysis.

Does Washington Conform to IRC Section 1031?

The question does not really arise for real estate. Washington has no state income tax for the exchange to defer, and its capital gains excise tax exempts real estate entirely. A 1031 exchange is an IRS-approved way to sell investment property and buy replacement property without paying federal tax on the gain right away, and that federal deferral works identically for Washington property. New to exchanges? Start with our 1031 exchange guide.

The Capital Gains Excise Tax, and Why It Skips Real Estate

Washington's excise tax on long-term capital gains took effect in 2022 and survived court challenge. The 2026 structure is 7% on covered gains above the annual standard deduction, plus an additional 2% (9% total) on covered gains above $1 million.

The statute carves real estate out explicitly. Gain from the sale of all real estate is exempt, whether it is a rental house in Spokane, an apartment building in Seattle, or bare land in Walla Walla. The exemption also extends to gains on the sale of certain ownership interests to the extent attributable to real estate. If you sell stock or a business with a large embedded gain, the excise tax deserves attention; if you sell a building, it does not.

This is worth stating plainly because some investors have delayed or restructured property sales based on headlines about the tax. For direct real property sales, there is nothing to plan around at the state level.

No Withholding at Closing

Washington has no state income tax withholding on real estate sales, resident or nonresident. Compare that with neighboring Oregon, which withholds on nonresident sales and tracks deferred gain with an annual filing. Selling in Washington means your full equity moves into the exchange without a state collection mechanism in the middle.

Why Do a 1031 Exchange in Washington at All?

Because the federal bill is still substantial. A Washington investor selling a $1,000,000 rental with $500,000 of gain faces federal capital gains tax, depreciation recapture, and possibly the net investment income tax, often $124,000 or more, as the example below shows. A qualifying exchange may defer all of it. The fundamentals do not change in a no-tax state: you must buy replacement property of equal or greater value, reinvest all the exchange proceeds, and offset any mortgage relief with new debt or additional cash. A qualified intermediary must hold the proceeds between sale and purchase; touching the money disqualifies the exchange.

Crossing State Lines: Where Washington Sellers Need to Be Careful

The state-level simplicity ends at the border. Common scenarios for Washington investors:

• Buying in Oregon. Future sales of Oregon property face Oregon income tax, Oregon withholds on nonresident sales, and if you later exchange out of Oregon, the state tracks your deferred gain with an annual Schedule OR-24 filing.
• Buying in California. California withholds at closing (Form 593 exemption available for exchanges) and tracks deferred gain with annual FTB 3840 filings if you ever exchange out of California property.
• Buying in Idaho. Idaho has a state income tax that will apply to future gains on Idaho property, though it has no closing withholding regime.

None of this should stop an exchange into a state with good fundamentals. It just means the tax simplicity you enjoyed in Washington does not travel with you, and the destination state's rules deserve a look before you identify replacement property. See our state-by-state guides at 1031 exchange rules by state.

Federal Taxes Still Apply

Here is what a taxable sale looks like without an exchange, using round numbers.

Example: $1,000,000 sale of a Washington rental. Original purchase $600,000, with $100,000 of depreciation taken, so the adjusted basis is $500,000 and the total gain is $500,000.

Figures are illustrative and rounded. Your rates depend on income, filing status, and basis. Run your own numbers with our 1031 exchange calculators, then confirm them with your tax advisor.

Risks and Things That Go Wrong in Washington Exchanges

• Assuming the excise tax applies. It does not apply to real estate, but selling an entity interest instead of the property itself can change the analysis. Get advice before restructuring a deal.
• Ignoring the destination state. The exchange itself is easy in Washington; the long-term tax picture depends on where you buy. Oregon and California, in particular, come with withholding and tracking regimes.
• Boot surprises. Cash taken at closing or mortgage relief not offset with new debt or additional cash creates recognized federal gain even though Washington collects nothing.
• Failed deadlines. The federal 45-day identification and 180-day completion rules apply everywhere, including no-tax states. See the IRS rules for 1031 exchanges.
• Deferral is not elimination. The IRS will tax the deferred gain when you eventually cash out. Plan the exit, not just the exchange.

Washington 1031 Exchange FAQs

Does Washington's capital gains tax apply to my property sale?
No. Real estate is statutorily exempt from Washington's capital gains excise tax under RCW 82.87. The tax targets gains on stocks, bonds, and certain other assets.

Is there any Washington withholding when I sell?
No. Washington has no income tax withholding on real estate sales for residents or nonresidents.

Why bother with a 1031 exchange in Washington?
Federal taxes. Capital gains, depreciation recapture, and the net investment income tax can easily exceed $120,000 on a $500,000 gain, and a qualifying exchange may defer all of it.

What is the 9% rate I have heard about?
Starting in 2026, Washington's excise tax adds a 2% surcharge (9% total) on covered gains above $1 million. It still does not apply to real estate.

Can I exchange my Washington property for property in another state?
Yes. Just review the destination state's rules first. States like Oregon and California add withholding and ongoing reporting that Washington never had.

Sources

• RCW 82.87 (capital gains excise tax; real estate exemption)
• Washington Department of Revenue, Capital Gains Tax guidance
• Tax Foundation, State Tax Data, 2026

Want to learn more?

Our 1031 exchange guide covers the full process from sale to replacement. Ready to start a Washington exchange? WealthBuilder 1031 is attorney-owned, serves all 50 states, and charges a flat $1,000 fee. Start at WealthBuilder1031.com or call 888-508-1901.

This page does not constitute legal or tax advice. Consult your attorney and tax advisor about your specific situation.

Ready to start your Washington 1031 exchange? WealthBuilder 1031 acts as your qualified intermediary for a flat $1,000 fee, $750 at your sale and $250 at your purchase. See our Washington 1031 exchange services to get started.