1031 exchange in
Washington.

Does Washington follow federal 1031 rules?

Washington has no state income tax, so there is no state-level income-tax 1031 deferral question for real property — federal §1031 deferral is the only deferral mechanism that matters. Washington's separate REET applies to each real estate closing regardless of 1031 treatment.

Washington capital gains tax structure

Washington has no personal income tax. Washington's 7% Capital Gains Excise Tax (RCW 82.87, ESSB 5096) explicitly EXCLUDES real estate from the tax base — the excise tax applies to stock, business interest, and other intangible asset gains above the annual threshold (~$270K, inflation-adjusted), not to real property gains. Real estate sales remain subject to Washington's separate Real Estate Excise Tax (REET) at the closing.

No state personal income tax. The 7% Capital Gains Excise Tax (RCW 82.87, ESSB 5096) applies to long-term capital gains from sales of stocks, bonds, business interests, and other intangible assets above an inflation-adjusted threshold (approximately $270K for 2026) — but real estate gains are explicitly excluded from the tax base by statute. Initiative 2109, which would have repealed the excise tax outright, was defeated by Washington voters in November 2024 (~63% no), so the excise tax is here to stay — but again, not on your real estate. The Real Estate Excise Tax (REET) is what real estate sellers actually pay: graduated rates of 1.1% on price up to $525K, 1.28% on $525K-$1.525M, 2.75% on $1.525M-$3.025M, and 3.0% above $3.025M (state portion); local city/county REET typically adds 0.25-0.50% as a flat additional rate on the entire price. Agricultural and timber land are treated as 'classified land' and pay a flat 1.28% state REET. REET applies to each real estate closing — no §1031 exemption.

Federal tax treatment of a successful 1031 is deferral of capital gain and unrecaptured Section 1250 depreciation recapture (federally taxed at a maximum 25% when eventually recognized). Washington's state treatment sits on top of those federal rates.

Common 1031 replacement strategies in Washington

Seattle and Bellevue are the institutional core. Class A office is in genuine distress — Seattle CBD vacancy has run 25%+ for several quarters, and trades that have closed since 2023 have repriced 30-50% off 2019 peaks. Patient capital with operating depth is starting to circle, but cap rates on the few stabilized trades that close are wide (7.5-9%+ on Class A with rollover risk) and the math depends entirely on your re-tenanting assumptions. Multifamily is more orderly — Class A garden-style and mid-rise on the Eastside (Bellevue, Redmond, Kirkland) trades 4.75-5.5% caps; urban Seattle Class A trades 5.0-5.75%. Industrial along I-5 and the Kent Valley remains the most liquid product type — credit-tenant logistics trades 5.25-6.0% on stabilized deals. Spokane is the secondary value market — multifamily Class B trades 6.5-7.5%, with eds-and-meds tenancy (Sacred Heart, Providence, Gonzaga) anchoring stabilized credit. Tacoma is the port-and-industrial play, with Port of Tacoma logistics absorbing meaningful institutional capital.

Top Washington CRE markets for 1031 buyers

Seattle

Bifurcated. Class A office is in genuine distress — sub-market vacancy has run 25%+ for multiple quarters and stabilized trades have repriced 30-50% off 2019 peaks. The few institutional trades that have closed sit at 7.5-9%+ caps with meaningful rollover risk and re-tenanting assumptions doing the heavy lifting. Class A multifamily downtown and in Capitol Hill, South Lake Union, and Ballard trades 5.0-5.75% on stabilized garden and mid-rise. The 3.0% top-bracket REET on any portion above $3.025M is a major sticker-shock item for out-of-state 1031 buyers — on a $20M Seattle deal, state REET alone is roughly $570K, plus 0.5% local in most jurisdictions.

Bellevue

Eastside tech tenancy (Microsoft, Amazon's secondary HQ presence, T-Mobile) anchors institutional credit. Class A office holds value better than Seattle CBD but is still soft — stabilized credit-tenant deals trade 6.5-7.5% with the Microsoft-anchored product trading tighter. Class A multifamily in downtown Bellevue, Redmond, and Kirkland trades 4.75-5.5% on stabilized garden and mid-rise — the tightest urban multifamily cap rates in the Pacific Northwest.

Spokane

The secondary WA market and the value play. Class B multifamily trades 6.5-7.5%, with eds-and-meds tenancy (Sacred Heart, Providence, Gonzaga, Whitworth) anchoring credit-tenant medical office at 6.0-6.75%. Industrial along I-90 trades 6.5-7.5% on stabilized credit deals. Spokane has been an active 1031 destination for California and Seattle exit-buyers seeking yield — broker depth is real but the market is thinner than Seattle and exit timelines run longer.

Tacoma

The Port of Tacoma anchors industrial absorption — port-adjacent logistics and distribution trade 5.5-6.5% on stabilized credit-tenant deals, with the Northwest Seaport Alliance (combined Tacoma + Seattle port operations) driving incremental institutional capital. Class B multifamily in Tacoma proper trades 6.0-7.0%, wider than Seattle by 75-150 bps and a credible value-add play for patient capital. Hilltop and downtown Tacoma have meaningful adaptive-reuse and value-add inventory.

Local counsel, recording, and filing in Washington

Washington is an escrow-state for CRE closings — title and escrow companies handle most closings without an attorney in the room. Retain Washington counsel anyway for any institutional 1031, particularly for the REET filing (it's not optional and the buyer is on the hook if mishandled) and for any Seattle-specific transaction where the city's first-right-of-refusal multifamily preservation rules might apply. Recording is at the county auditor; King, Pierce, Snohomish, and Spokane handle the bulk of CRE volume. Title insurance is competitively priced and not state-regulated. Washington is a community property state, which affects entity structuring on the buyer side — coordinate with your QI before structuring.

Common mistakes in Washington 1031 exchanges

• Thinking the 7% Capital Gains Excise Tax applies to your real estate sale. It doesn't. The Washington Capital Gains Excise Tax (RCW 82.87, ESSB 5096) explicitly excludes real estate from the tax base. The excise applies to stocks, bonds, business interests, and other intangible asset gains above the inflation-adjusted threshold — not to real property gains. Initiative 2109's 2024 defeat preserved the excise but did not change the real estate exclusion. Out-of-state CPAs sometimes flag this as an additional 1031 concern; it isn't.
• Forgetting REET applies to each leg of a 1031 chain. Washington's Real Estate Excise Tax is graduated 1.1-3.0% (state portion) plus 0.25-0.50% local in most jurisdictions, and there is no §1031 exemption. On a $10M Seattle replacement upleg, combined REET is roughly $260-310K depending on local rate; on a $20M deal it's $570K+. This is the single largest transaction-cost surprise for out-of-state 1031 buyers entering Washington. Bake it into your bid, not your pro forma.
• Underwriting Seattle Class A office without a re-tenanting reserve. Stabilized Class A office in Seattle CBD has repriced 30-50% off 2019 peaks because the underlying lease economics no longer support old cap rates. Buying at the new pricing without a meaningful re-tenanting reserve, leasing-cost reserve, and a multi-year lease-up timeline assumption is how out-of-state 1031 buyers get caught. The cap rate is a function of the lease, not the building.

What to do if you're starting a Washington-source 1031

1. Engage a Qualified Intermediary before the downleg closes. Your QI cannot be a disqualified person (attorney, CPA, or real estate agent who has represented you in the last two years).
2. Confirm state conformance and any clawback or withholding filings with a Washington-licensed CPA.
3. Identify replacement property within 45 days in writing, delivered to your QI, under the Three-Property Rule or one of the alternative identification rules.
4. Close on replacement within 180 days of the downleg closing or by your federal tax-return due date (with extensions), whichever is earlier.
5. File Form 8824 with your federal return reporting the exchange. File any required Washington state forms for the year, including any clawback or withholding-exemption filings.

FAQ: 1031 exchanges in Washington

Does Washington's 7% Capital Gains Excise Tax apply to my real estate 1031?

No. The Washington Capital Gains Excise Tax (RCW 82.87, ESSB 5096) explicitly excludes real estate gains from the tax base. The excise applies to long-term capital gains from sales of stocks, bonds, business interests, and other intangible assets above the annual inflation-adjusted threshold (~$270K for 2026). Real estate gains — including any boot recognition on a 1031 — are not subject to the excise. Washington does not have an income tax, so there is no state income tax on the gain either. What you do owe is Real Estate Excise Tax (REET) at closing.

What is REET and how much does it cost on a 1031 closing?

Washington's Real Estate Excise Tax is a graduated transaction tax on every real estate closing. State portion: 1.1% up to $525K, 1.28% on $525K-$1.525M, 2.75% on $1.525M-$3.025M, and 3.0% above $3.025M. Local portion: typically an additional 0.25-0.50% applied flat on the entire price. There is no §1031 exemption — REET applies to both the relinquished and replacement legs. Agricultural and timber 'classified land' pays a flat 1.28% state REET regardless of price.

Did the 2024 repeal initiative change anything for real estate?

No. Initiative 2109 would have repealed the Capital Gains Excise Tax outright, but it was defeated in November 2024 (roughly 63% voted no). Even if it had passed, the real estate exclusion was already baked into the excise statute — repeal would not have changed REET, which is a separate tax that has been in place since 1951.

Is there a way to reduce REET on a high-value Seattle or Bellevue 1031 closing?

Limited options, all with friction. Controlling-interest transfers (selling LLC interests rather than the underlying property) historically were used to avoid REET, but Washington statute (RCW 82.45.010) treats a transfer of a controlling interest in a real-property entity as a taxable transfer for REET purposes — so the workaround is mostly closed for entities holding real estate primarily as an asset. Long-term lease structures (50+ years) and certain entity reorganizations have narrow REET exemptions; consult Washington counsel before structuring around them.

Why is Seattle Class A office trading at such wide cap rates?

Genuine distress. Seattle CBD office vacancy has run 25%+ for multiple quarters since 2022, the post-COVID hybrid-work environment hit Seattle harder than most major metros (large tech employers anchored downtown but kept aggressive remote policies), and lease rollovers have repriced rents 20-40% below pre-2020 levels. Stabilized trades are happening at 7.5-9%+ caps with rollover risk and re-tenanting assumptions doing the heavy lifting. This is genuinely a patient-capital opportunity for buyers with operating depth — and a graveyard for buyers who underwrite the cap rate without underwriting the lease.

How does Washington's community-property status affect a 1031?

Mostly on the buyer-entity-structuring side. Washington is a community property state, so married couples acquiring replacement property need to consider whether to take title as community property, joint tenants, or via an LLC. The federal §1031 mechanics are unaffected, but the eventual step-up basis at death and probate treatment differs materially based on title structure. Coordinate with your QI and a Washington estate attorney before closing.