1031 Tax Exchange in Washington State: REET, QI, and Deadlines

A 1031 exchange in Washington state lets a real estate investor sell one investment property and buy another of like kind without paying federal capital gains tax on the sale, as long as the transaction runs through a qualified intermediary and meets the IRS’s 45-day and 180-day deadlines. What Washington adds is the Real Estate Excise Tax (REET), which the seller owes at closing whether or not the sale is part of an exchange. Plan for both layers from the start, because the federal deferral does not touch the state tax bill.

What Section 1031 Actually Defers

Under Section 1031 of the Internal Revenue Code, no gain or loss is recognized when you exchange real property held for business or investment for other real property of like kind that you’ll also hold for business or investment purposes.¹ The IRS treats the sale and the purchase as a single exchange. Your basis in the old property carries over to the new one, so you are not erasing the tax. You are pushing it forward until you eventually sell without exchanging.

“Like-kind” is broader than it sounds. It refers to the nature of the property, not its quality or use. A warehouse can be exchanged for a retail building, an apartment complex for vacant land, or a single rental house for a commercial office. Both properties just have to be real property held for investment or business use.¹

What doesn’t qualify: your personal residence, a vacation home you use primarily for personal enjoyment, or property held mainly for resale, such as a fix-and-flip. The statute also excludes stocks, bonds, notes, partnership interests, and other securities.¹ Since the Tax Cuts and Jobs Act, only real property qualifies.

The Two Deadlines That Control the Exchange

Two hard deadlines govern every deferred exchange, and missing either kills the deferral entirely. Both clocks start on the day you close the sale of the relinquished property.

You have 45 calendar days to identify potential replacement properties in writing and deliver that identification to your qualified intermediary or another party to the exchange.¹
You have 180 calendar days from that same closing date to actually close on the replacement property.¹

There’s a trap in the 180-day window. The actual deadline is 180 days or the due date of your federal return for the year of the sale (including extensions), whichever comes first.² Sell in October and your April 15 return date arrives before day 180. File a tax return extension as a precaution, whether or not you think you’ll need it.

How To Identify Replacement Properties

The Treasury regulations give you two main ways to identify properties during the 45-day window. Under the three-property rule, you can name up to three properties regardless of their combined value. Under the 200-percent rule, you can identify any number of properties as long as their total fair market value doesn’t exceed twice the value of the property you sold.³ Most investors use the three-property rule because it is simpler and still leaves room for backup options.

Reinvest Everything, Or Pay Tax on Boot

To defer the entire gain, you have to reinvest all the equity from the sale and replace the debt you had on the old property. Fall short on either side and you create “boot,” the portion of the exchange that gets taxed.

Cash boot is straightforward. If your relinquished property sells for $800,000 but you only spend $750,000 on the replacement, that $50,000 is taxable. Mortgage boot works the same way. If you had a $300,000 mortgage on the old property but only take on $200,000 in new debt, the $100,000 in debt relief is treated as boot.¹ You can offset mortgage boot by putting more cash into the replacement, but that has to be planned before closing.

Partial exchanges are allowed. You’ll pay tax on the boot and defer the rest, which can be a deliberate choice when you want to pull some cash out.

Washington’s Real Estate Excise Tax Still Applies

This is where a Washington exchange gets more expensive than one in most states. REET under RCW 82.45 applies to every sale of real property in Washington, and a 1031 exchange does not exempt you from it.⁴ The tax is calculated on the gross sale price of the relinquished property at graduated state rates:

$525,000 or less: 1.10%
$525,001 to $1,525,000: 1.28%
$1,525,001 to $3,025,000: 2.75%
Over $3,025,000: 3.00%

Those are the state rates.⁵ Every jurisdiction adds a local REET on top. Local rates run 0.25% to 0.50% in most cities and counties, though a few areas are higher. San Juan County, for example, charges 2.00%.⁶ On a $2 million sale in King County (0.50% local rate), you’d owe roughly $32,850 in state REET plus $10,000 in local REET, over $42,000 out of your exchange proceeds before you buy the replacement.

REET is the seller’s obligation and is due at the time of sale. Escrow typically handles payment at closing, which is why late penalties are uncommon in normal transactions. If payment does run late, the penalty is 5% of the tax after one month, 10% after two months, and 20% after three months, plus interest at 6% per year.⁵

Washington’s Capital Gains Tax Does Not Hit Real Estate

The 7% state capital gains tax enacted in 2021 under RCW 82.87 alarms a lot of Washington investors, but it does not apply to the sale or exchange of real estate.⁷ It targets long-term gains from stocks, bonds, business interests, and similar non-real-estate assets above a standard deduction of $278,000 in 2025, adjusted annually for inflation.⁸ So a Washington real estate investor running a 1031 has no state capital gains tax to worry about on top of REET.

You Must Use a Qualified Intermediary

You cannot touch the sale proceeds and still qualify for deferral. A qualified intermediary (QI) holds the funds between the sale and the purchase so you never have actual or constructive receipt of the money. This is the structural backbone of a deferred exchange, not an optional service.

The QI has to be someone who has not acted as your agent in the two years before the exchange. Your real estate agent, attorney, accountant, and employees are all disqualified. Banks, title companies, and firms that specialize in exchange accommodations can serve. Fees for a standard deferred exchange typically run $500 to $1,500. More complex transactions cost more.

The exchange agreement spells out the QI’s duties: receiving the proceeds, holding them in a segregated account, and disbursing them to the seller of the replacement property at closing. If the QI goes bankrupt or absconds with the funds, you bear the loss. Choose a QI with fidelity bonding and segregated escrow accounts.

Related Party Exchanges Come With a Two-Year Hold

Exchanging with a family member or an entity you control triggers extra rules under Section 1031(f). The IRS defines related parties broadly: spouses, siblings, parents, children, and entities where you hold more than 50% ownership.¹

When you exchange with a related party, both of you must hold your respective replacement properties for at least two years. If either party sells before the two years are up, the exchange loses its tax-deferred status and the gain becomes taxable as of the date of that early sale.¹ The two-year clock does not apply if the early disposition results from death, an involuntary conversion such as a condemnation, or a showing to the IRS that tax avoidance was not a principal purpose of the transaction. You also cannot buy replacement property from a related party who then cashes out the proceeds; the IRS treats that as an end run around the two-year rule.

Reverse Exchanges When You Buy First

Sometimes the right replacement property comes on the market before your current one has sold. A reverse exchange lets you buy first and sell second. Under IRS Revenue Procedure 2000-37, an exchange accommodation titleholder (EAT) takes title to either the replacement or the relinquished property and parks it until the exchange can close.⁹ The EAT is treated as the beneficial owner for federal tax purposes during the parking period. The same 45-day and 180-day clocks apply.

Reverse exchanges cost more. The EAT charges its own fee, you often need bridge financing to acquire the replacement before the sale proceeds come in, and the documentation is heavier. Expect several thousand dollars more than a standard exchange.

Paperwork: State Affidavit and Federal Form 8824

Every real estate sale in Washington requires a Real Estate Excise Tax Affidavit (Form REV 84 0001a) filed with the county treasurer’s office where the property sits.¹⁰ The affidavit needs seller and buyer names, parcel numbers, the gross selling price, and a line-by-line calculation of the excise tax at each graduated rate bracket. Counties reject affidavits with missing fields. Escrow ordinarily handles filing and payment alongside the deed transfer and recording.

On the federal side, file IRS Form 8824 with your return for the year in which you transferred the relinquished property.¹¹ The form calculates the deferred gain, reports any recognized gain from boot, and sets the basis of the replacement property. For related-party exchanges, Form 8824 must also be filed for the two tax years following the exchange, three filings total. Keep your exchange agreement, identification notice, both settlement statements, and all QI correspondence for at least seven years. The IRS can look past its usual three-year statute of limitations if it suspects underreported income.

1
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Property Held for Productive Use or Investment
2
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
3
eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
4
Washington State Legislature. RCW 82.45 – Excise Tax on Real Estate Sales
5
Washington Department of Revenue. Real Estate Excise Tax
6
Washington Department of Revenue. Local Real Estate Excise Tax Rates
7
Washington Department of Revenue. Frequently Asked Questions About Washingtons Capital Gains Tax
8
Washington Department of Revenue. Capital Gains Tax
9
Internal Revenue Service. Revenue Procedure 2000-37
10
Washington State Department of Revenue. Real Estate Excise Tax Affidavit – Form REV 84 0001a
11
Internal Revenue Service. 2025 Instructions for Form 8824