1031 Exchange in Washington: REET, the Capital Gains Tax Exclusion and DSTs

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.

Seattle adds a 0.5% local REET, and its relocation and 180-day notice rules explain why owners sell more than what a sale triggers

The Department of Revenue's local rate table effective January 1, 2026 lists Seattle, location code 1726, at 0.50 percent, the same local rate as Bellevue and unincorporated King County, and the Department's instruction is that the local REET is calculated and added to the graduated state rate. On a $2,000,000 Seattle apartment building the state tiers produce $31,637.50 and the city's half percent adds $10,000, so $41,637.50 leaves the closing statement before the net proceeds reach the qualified intermediary. The exchange defers the federal gain; it does not touch either REET figure, and the 2027 threshold shift described above moves the state portion only slightly.

Seattle's rental ordinances are the other reason owners call. Since July 1, 2022, Economic Displacement Relocation Assistance applies when a landlord raises housing costs by 10 percent or more within 12 months: a tenant household at or below 80 percent of area median income, which the city's 2025 table sets at $84,850 for one person, that gives notice to leave is paid three times its monthly housing cost by the City, and the landlord must then reimburse the City. Separately, every housing cost increase in Seattle requires 180 days' advance written notice, a rule in force since November 9, 2021, carrying the Renting in Seattle helpline language, with an attached relocation notice when the increase reaches 10 percent. A defective notice lets the tenant end the lease on 20 days' notice and exposes the owner to civil penalties of up to $7,500 per violation, and since May 7, 2025 a statewide cap of 7 percent plus inflation, at most 10 percent a year, sits on top for most units.

None of that is triggered by the sale itself. Relocation assistance and the notice period attach to rent increases, so a closing does not owe a tenant anything under them, and the existing tenancies, together with any notice already served, pass to the buyer. What the exchange changes is who carries those rules next year. An owner who replaces the building with a DST holding property outside Seattle leaves the city's landlord ordinances behind entirely; the trust's property answers to its own state's landlord-tenant law, and the trustee, not the investor, serves the notices. The price of that exit is the REET above, paid once, and the loss of control that comes with a trust interest, which the DST page sets out alongside its illiquidity and risk of loss.