1031 Exchange in Seattle: What the Exchange Does and Doesn't Resolve

A 1031 exchange can defer federal income tax on the gain from your Seattle sale. It does not remove Washington's real estate excise tax on that sale. This page separates the two, so you know what to settle before closing.

The short answer

A 1031 exchange defers federal income tax on the gain when you sell Seattle real estate held for investment or business use and acquire replacement real estate on time, through a qualified intermediary. Washington has no personal income tax on that gain to defer, and real estate transferred by deed is excluded from the state's capital gains excise tax. The tax that still matters at a Seattle closing is the real estate excise tax (REET), charged on the selling price. A 1031 exchange does not make the sale to your buyer exempt from it.

Three taxes, three different answers

1. Federal income tax on the gain: this is what the exchange defers. Section 1031 lets you defer gain when you exchange real property held for productive use in a trade or business or for investment for like-kind real property (26 U.S.C. §1031(a)(1)). The gain is postponed, not forgiven: your basis carries over into the replacement property (§1031(d)). Cash or other property you receive ("boot") is taxable up to the gain you realize (§1031(b)).

2. Washington's capital gains excise tax: deeded real estate is excluded. The tax does not apply to "all real estate transferred by deed, real estate contract, judgment, or other lawful instruments that transfer title to real property" (RCW 82.87.050(1)). One caveat: if you sell an interest in an entity (an LLC or partnership that owns the building) rather than the building itself, the exclusion applies only to the extent the gain is attributable to real estate the entity owns directly (RCW 82.87.050(2)(a)). Separately, a partnership interest is not real property for 1031 purposes at all (see the questions below). If your Seattle property is held in a multi-member LLC, raise this with your CPA before listing.

3. Real estate excise tax (REET): charged on the sale price, with or without an exchange. Washington's REET is a state tax on the selling price, graduated by price tier, plus a local rate. For sales through December 31, 2026, the Department of Revenue lists the state tiers as:

Each state rate applies only to the part of the price that falls within its tier (RCW 82.45.060). Seattle's local REET rate is 0.50% (location code 1726), which the Department says must be added to the graduated state rate for the total tax due. The tier thresholds change on January 1, 2027. Your escrow officer calculates the exact amount on the excise tax affidavit.

Who pays. The Department says the seller usually pays REET, but if the seller doesn't, the buyer is responsible, and unpaid tax can become a lien on the property.

Does the exchange change REET? Not for the sale to your buyer. Washington's exchange rule covers a narrower situation: an exchange facilitator that takes title to property. The facilitator's acquisition is taxable. Its later transfer to you is relieved only if the tax was paid on the first transfer, a supplemental statement from the facilitator is attached to the affidavit, and the funds came from you or your sale (WAC 458-61A-213). That matters mostly in reverse or improvement exchanges, where a facilitator holds title. In a typical forward exchange it does not reduce the REET on your sale.

Where are you in the process?

• Selling first (not yet closed). The exchange has to be in place before the deed transfers: an exchange agreement with a qualified intermediary, your sale contract assigned, all parties notified in writing, and closing instructions sending the proceeds to the intermediary. Once the proceeds reach you, or you can draw on them, the transaction is treated as a sale (Treas. Reg. §1.1031(k)-1(f)). Budget for REET out of the proceeds as usual.
• Buying first (found the replacement before selling). A standard deferred exchange starts with the sale. Buying first needs a reverse exchange, with an exchange accommodation titleholder holding title (Rev. Proc. 2000-37, modified by Rev. Proc. 2004-51). In Washington that structure is where WAC 458-61A-213 comes into play. See reverse 1031 exchanges.
• Already closed and received the money. If you actually or constructively received the proceeds, the regulations treat the transaction as a sale, even if you later buy similar property (§1.1031(k)-1(f)(1)). Talk to your CPA about reporting the sale.

Educational next steps, not an eligibility determination.

The two clocks

From the day the Seattle property transfers, you have 45 days to identify replacement property in a signed writing delivered to the right person. You then have until the earlier of day 180 or your tax return due date for that year, including extensions, to receive it (26 U.S.C. §1031(a)(3); Form 8824 instructions). For a late-year closing, extending your return can protect the full 180 days. Count your dates in the deadline calculator, and see why the return due date can cut the 180 days short.

Replacing outside Washington

Real property in one state is generally like-kind to real property in another, so a Seattle sale can be exchanged into property elsewhere in the U.S. U.S. and foreign real property are not like-kind (§1031(h)). The destination state's rules apply to the property you buy: its own taxes, recording costs and, in some states, filing obligations when you later sell. See buying replacement property out of state and which states recognize 1031 exchanges.

Washington's exchange-facilitator law: what to ask any intermediary

Federal tax rules define what a qualified intermediary must do. They do not set bond or insurance requirements. Washington adds its own consumer protections in RCW 19.310, and you can ask any intermediary for evidence of each:

• A bond or a protected account. A fidelity bond of at least $1,000,000, or all exchange funds held in a qualified escrow account or qualified trust where withdrawals need both your and the facilitator's authorization (RCW 19.310.040).
• Errors and omissions coverage of at least $250,000, or an equivalent deposit. The facilitator must give each client evidence that these requirements are met before entering into an exchange agreement (RCW 19.310.060).
• A separate account and written notice. Your funds are held in a separately identified account for your exchange, and you receive written notice of how they are invested or deposited (RCW 19.310.110).

A bond covers specified dishonest acts. It is not a guarantee of your funds.

Before closing: what to settle in Seattle

Watch

General rule explainer — not recorded for Seattle

If the Funds Hit Your Account, It's Over · 20 seconds

This short clip covers the general rule about receiving sale proceeds. Washington's REET and capital gains rules are covered in the text above, not in the clip.

A hypothetical sequence

Hypothetical — not a client and not a result. A couple owns a Seattle duplex they have rented out for years and plan to sell. They want a small apartment building in Spokane or a rental in another state. Before listing they sort out four things. The duplex is deeded in both their names, so the sale is a transfer of real estate, not of an entity interest. REET on the sale price is a closing cost the exchange will not remove, so they plan for it in the net proceeds going to the intermediary. The exchange agreement and assignment are signed before closing, and the escrow officer's instructions send proceeds to the intermediary. Their CPA confirms how any cash they keep back would be taxed as boot. Whether the exchange works, and what it defers, depends on their actual facts and filings.

Frequently asked questions

Does a 1031 exchange avoid Washington's real estate excise tax?

No. REET is charged on the sale to your buyer whether or not you exchange. Washington's exchange rule (WAC 458-61A-213) addresses transfers to and from a facilitator that takes title, and even then relieves only the second transfer, under three conditions.

If Washington doesn't tax my gain, why do an exchange?

Because federal income tax on the gain still applies, and that is what section 1031 defers. Washington's capital gains excise tax excludes real estate transferred by deed, so for a deeded Seattle sale the state-level cost is mainly REET, not income tax (26 U.S.C. §1031(a); RCW 82.87.050).

Our building is in an LLC with my business partner. Can we exchange our LLC interests?

Not as a 1031 exchange. Interests in a partnership, which a multi-member LLC usually is for tax purposes, are not real property for section 1031 (Treas. Reg. §1.1031(a)-3(a)(5)). Washington's capital gains exclusion for entity interests is also only partial. Restructuring before a sale has its own tax questions, so get advice before signing a listing. See 1031 exchanges and LLCs.

Can I buy the replacement property in another state?

Yes. U.S. real property is generally like-kind to other U.S. real property; only foreign real property is excluded (§1031(h)). The destination state's own taxes and filing rules then apply to the new property.

Does Washington regulate 1031 intermediaries?

Washington does not license them, but RCW 19.310 sets bond (or protected-account), errors-and-omissions, account-separation and notice requirements for exchange facilitators, and you can ask for evidence before you sign.

Who you'll work with

Leah Badach is a Certified Exchange Specialist with 11+ years of 1031 exchange experience. Standard, reverse and improvement exchanges are all available. Before you sign, Leah confirms in writing which qualified intermediary will hold your funds and gives you its account, bond and insurance documents. The intermediary is a company, not an individual: the exchange agreement, the account holding your funds, and any bond or insurance belong to it, so ask for each in writing. You can verify the credential in the FEA CES directory.

Related: 1031 exchanges in Washington State · Reverse 1031 exchange · 1031 exchange timeline · Deadline calculator · Questions to ask any qualified intermediary · State tax rates and 1031 exchanges

Sources

• 26 U.S.C. §1031: deferral, boot, basis, the 45- and 180-day periods, and the foreign-property exclusion.
• Treas. Reg. §1.1031(k)-1: actual and constructive receipt, and qualified intermediaries.
• Treas. Reg. §1.1031(a)-3: partnership interests are not real property.
• Form 8824 instructions: the exchange period and the return due date.
• Rev. Proc. 2000-37 and Rev. Proc. 2004-51: reverse exchanges.
• Washington DOR, real estate excise tax: graduated state rates, who pays, and liens.
• Washington DOR, local REET rates (May 1, 2026): Seattle, location code 1726.
• RCW 82.45.060: how the graduated state rates apply to the selling price.
• WAC 458-61A-213: REET and exchange facilitators.
• RCW 82.87.050: capital gains excise tax exclusion for real estate.
• RCW 19.310: exchange facilitators (bond, E&O, separate accounts, notice).

Educational information, not tax or legal advice.