09/22/2026
Want to do a 1031 tax exchange to purchase your next home? 🏡
While a 1031 exchange defers federal liabilities, its interaction with Washington state law requires careful financial planning: Federal Taxes Deferred: The exchange successfully defers the 15% to 20% federal capital gains tax, the 3.8% net investment income tax (NIIT), and the 25% depreciation recapture tax.
Exemption from State Capital Gains Tax: Washington’s 7% capital gains excise tax explicitly exempts real estate. Because Washington has no personal income tax, there is no state-level income or capital gains tax to defer in a 1031 exchange.
The R**T Trap (Non-Deferred Cost): Unlike almost every other state, Washington's Real Estate Excise Tax (R**T) cannot be deferred. R**T is a transfer tax on the gross sales price, not the gain. It is a graduated tax starting at 1.10% and rising up to 3.0% depending on property value, plus local surtaxes. You must pay R**T at closing out of your cash proceeds, which reduces the total equity transferred to your intermediary.
Questions? Call me or PM me for your unique situation.
