The short answer
Washington has no individual income tax, and its 7% capital gains excise tax excludes real estate, so a Washington investor selling a rental building owes no state tax on the gain whether or not a 1031 exchange is used. The state tax that does apply is the graduated real estate excise tax (REET), which is the seller's obligation on the sale and is not deferred by an exchange. The exchange still defers the federal tax, and it can move equity into DST property in states that do tax rental income.
Washington at a glance
| State income tax | None today; a 9.9% tax on AGI over $1 million is scheduled to begin January 1, 2028 |
|---|---|
| Capital gains excise tax | 7%, plus 2.9% on gains over $1 million; real estate is excluded (RCW 82.87.050) |
| State REET tiers, 2023 through 2026 | 1.10% to $525K; 1.28% to $1.525M; 2.75% to $3.025M; 3.0% above |
| State REET tiers from January 1, 2027 | 1.10% to $551K; 1.28% to $1.551M; 2.75% to $3.051M; 3.0% above |
| Who owes REET | The seller (RCW 82.45.080); a 1031 exchange does not defer it |
| Withholding at closing | None; Washington has no income tax withholding on real estate sales |
| Claw-back of deferred gain | None |
| Estate tax exclusion | $3,000,000 for deaths on or after July 1, 2026 |
Washington's REET is owed on the sale even inside an exchange
Selling Washington real estate triggers the real estate excise tax, and a 1031 exchange does not defer it. RCW 82.45.080 makes the tax the seller's obligation and lets the Department of Revenue collect it as a debt or foreclose on the property, so the amount comes off the top at closing before net proceeds reach the qualified intermediary.
The state rate is graduated on the selling price under RCW 82.45.060. For sales from January 1, 2023 through December 31, 2026 the tiers are 1.10% on the first $525,000, 1.28% on the portion from $525,000 to $1,525,000, 2.75% from $1,525,000 to $3,025,000 and 3.0% above that.
Cities and counties add a local REET under chapter 82.46 RCW, typically 0.25% or 0.50%. On a $2,000,000 apartment building the state portion works out to $31,637.50, and a 0.50% local rate adds $10,000, so the seller parts with roughly $41,600 that no exchange recovers.
Land classified as agricultural or timberland is taxed at a flat 1.28% instead of the graduated scale. REET also applies when 50% or more of an entity holding Washington real estate changes hands, a controlling interest transfer that investors who own through an LLC cannot plan around.
The REET thresholds move on January 1, 2027
RCW 82.45.060 adjusts the tier thresholds every four years, and the Department of Revenue has published the tiers for sales on or after January 1, 2027: 1.10% up to $551,000, 1.28% to $1,551,000, 2.75% to $3,051,000 and 3.0% above. The next adjustment after that is scheduled for 2031.
The shift is modest, but on a sale near a breakpoint it changes which tier the last dollars fall into. An investor negotiating a closing late in 2026 can compare both tables before choosing a date, and a real estate excise tax affidavit must accompany the deed either way.
Washington's capital gains tax does not reach real estate, exchange or no exchange
Washington's excise tax on long-term capital gains under RCW 82.87.040 is 7% of Washington capital gains above a standard deduction, plus an additional 2.9% on the portion of gains over $1,000,000 for sales on or after January 1, 2025. The deduction was $278,000 for 2025 and is adjusted for inflation each year.
Real estate is outside the tax entirely. RCW 82.87.050 exempts all real estate transferred by deed, real estate contract or other recorded instrument, and it also exempts gain on an interest in a privately held entity to the extent the gain is directly attributable to real estate the entity owns directly.
A Washington investor therefore has no state income or capital gains tax to defer on a rental property. The reason to exchange is the federal tax, including depreciation recapture, which the federal eligibility rules let the investor defer by moving into like-kind replacement property such as a DST.
No withholding, no claw-back, and no income tax until at least 2028
Washington has no state withholding on real estate sales and no rule that follows deferred gain into another state, because there is no state income tax to collect it with. The Department of Revenue's own statement is that Washington does not currently have an individual income tax.
That changes for the highest earners. The Department reports that the 2026 Legislature enacted Senate Bill 6346, creating a 9.9% income tax on individuals and married couples filing jointly with adjusted gross income over $1 million beginning January 1, 2028, with the first returns due in April 2029.
How that tax will treat gain from a later taxable sale of exchanged property, or DST rental income flowing into adjusted gross income, is something a Washington investor should raise with a CPA once rules are issued. Nothing about it changes the mechanics of an exchange closed in 2026.
Annual revaluation, not the sale, drives Washington property tax
A sale does not reset a Washington assessment. RCW 84.41.030 requires county assessors to revalue all taxable real property every year and physically inspect it at least once every six years, with values set at 100% of true and fair market value.
The buyer of Washington replacement property therefore inherits the assessor's cycle rather than a purchase-price reassessment, while the seller's REET affidavit becomes one of the sales the assessor draws on in the next revaluation.
Washington's estate tax reaches DST interests held by residents
Washington imposes an estate tax on individuals domiciled in the state and on nonresidents who own Washington real estate or tangible personal property. The Department of Revenue lists the exclusion at $3,076,000 for deaths from January 1 through June 30, 2026 and $3,000,000 for deaths on or after July 1, 2026.
An investor who exchanges a Washington building into DST interests is trading Washington real estate for intangible interests that remain in a Washington-domiciled estate. With a $3,000,000 threshold, that is a planning point to review with estate counsel alongside the exchange.
Replacement property
For a Washington seller, a DST swaps a no-tax state for the property's state
A DST is the replacement property a Washington investor can buy without taking on management, and Rev. Rul. 2004-86 confirms that the beneficial interest qualifies as like-kind real property for Section 1031 purposes. The traditional DST page explains how the trust is structured and what the trustee may not do.
The state-tax picture reverses on the replacement side. Washington collects nothing on rental income, but the states where DST properties sit generally source that income to the property's location, so a Washington resident holding a DST with property in a state that taxes income may need to file a nonresident return there and pay tax with no Washington credit to offset it.
Washington's capital gains exemption for real estate held through a privately held entity appears to cover a later sale of the DST interest to the extent the gain comes from the trust's real estate, but that reading should be confirmed with a CPA, and REET and filing questions belong with the Department of Revenue before closing.
Questions investors ask about 1031 exchanges in Washington
Do I owe Washington REET if I sell my rental and complete a 1031 exchange?
Yes. REET is the seller's obligation under RCW 82.45.080 and is measured on the selling price at closing; nothing in chapter 82.45 RCW defers it for a like-kind exchange.
Does Washington's 7% capital gains tax apply to the sale of an apartment building?
No. RCW 82.87.050 exempts real estate transferred by deed or other recorded instrument, and gain on an entity interest to the extent it comes from real estate the entity owns directly.
Which REET table applies if my sale closes in January 2027?
The tiers effective January 1, 2027: 1.10% to $551,000, 1.28% to $1,551,000, 2.75% to $3,051,000 and 3.0% above, plus local REET.
Will Washington tax my DST income after the exchange?
Washington currently taxes no individual income. The state where the DST's property is located may tax that rental income to you as a nonresident, and beginning in 2028 Washington's new 9.9% tax on adjusted gross income over $1 million could apply to very high earners.
If I sell the membership interests in my LLC rather than the Washington building, is REET still due?
Usually yes. A transfer of 50% or more of an entity that owns Washington real estate is a controlling interest transfer subject to REET, with a return due within five days.
Sources
The rules above were checked against these publications on September 18, 2026. Rates and forms change; confirm the current version with your CPA and the Washington tax agency before you close. This page is general information, not tax or legal advice.
- RCW 82.45.060 (REET rates and threshold adjustments)
- RCW 82.45.080 (REET is the seller's obligation)
- Washington Department of Revenue: Real estate excise tax
- RCW 82.87.040 (capital gains tax rate and 2.9% additional tax)
- RCW 82.87.050 (capital gains tax exemptions, including real estate)
- Washington Department of Revenue: Income tax
- Washington Department of Revenue: Estate tax
- RCW 84.41.030 (annual revaluation and six-year physical inspection)