Real estate investing builds wealth, but capital gains taxes can eat into your profits when you sell. Washington doesn’t have a state income tax, which gives property owners an advantage. However, federal capital gains taxes still apply, and recent changes to state tax law have added new considerations for high-value transactions. Understanding your options before you sell can save you thousands of dollars and help you reinvest more efficiently.
The 1031 Exchange Strategy
A 1031 exchange lets you defer capital gains taxes by reinvesting proceeds from one investment property into another. You can’t pocket the cash during this process. The funds must go directly from one property to the next through a qualified intermediary. The rules are strict. You have 45 days to identify potential replacement properties and 180 days to close on the new purchase. Many investors use this strategy repeatedly over the years, deferring taxes until they eventually sell without exchanging or passing the property to heirs. Your replacement property must be of equal or greater value, and it needs to be another investment property. You can’t exchange into your primary residence without additional planning steps.
Timing Your Sale Around Tax Brackets
The difference between short-term and long-term capital gains rates is significant. If you sell property you’ve owned for less than a year, you’ll pay ordinary income tax rates, which can reach 37% at the federal level. Hold the property for at least one year, and you’ll qualify for long-term capital gains rates of 0%, 15%, or 20%, depending on your income. Timing also matters within a single year. If you’re close to a tax bracket threshold, selling in a year when your other income is lower can reduce your overall tax burden. A Bellevue tax planning lawyer can help you model different scenarios and choose the best timing.
Offsetting Gains With Losses
Tax-loss harvesting isn’t just for stock portfolios. If you have underperforming properties, selling them in the same year as a profitable sale can offset your gains. This strategy requires careful planning because real estate transactions don’t close as quickly as stock sales. You might also carry forward unused losses from previous years. The IRS allows you to deduct up to $3,000 in capital losses per year against ordinary income, and you can carry forward the remainder indefinitely.
Washington’s Capital Gains Tax
Washington State enacted a 7% capital gains tax on profits exceeding $250,000 from the sale of stocks, bonds, and certain other assets. Real estate sales are generally exempt from this tax, but there are exceptions. If you sell real estate held in certain business structures or if the property doesn’t qualify for the exemption, you could face this additional tax layer. The law is still relatively new, and working with a Bellevue tax planning lawyer helps you understand whether your specific transaction falls under the exemption.
Installment Sales For Spreading Tax Liability
An installment sale lets you receive payments over multiple years instead of a lump sum. This spreads your capital gains across several tax years, potentially keeping you in a lower tax bracket each year. You’ll pay taxes only on the portion of gain you receive each year. This strategy works well when selling to family members or in seller-financed deals. Interest rates and payment terms need to meet IRS requirements to avoid problems.
Opportunity Zone Investments
Qualified Opportunity Zones offer tax benefits if you reinvest capital gains into designated economically distressed areas. You can defer paying taxes on the original gain until 2026 or when you sell the Opportunity Zone investment, whichever comes first. If you hold the new investment for at least 10 years, you won’t pay any capital gains tax on the appreciation of that investment. The Seattle area has several designated Opportunity Zones, making this strategy accessible for local investors.
Primary Residence Conversion
Converting a rental property into your primary residence can unlock the home sale exclusion. Single filers can exclude up to $250,000 in gains, and married couples filing jointly can exclude up to $500,000. You must live in the home for at least two of the five years before selling. The IRS also requires that you haven’t used this exclusion on another property in the past two years. This strategy requires advance planning but can eliminate a substantial tax bill.
Planning Ahead Protects Your Investment
Real estate investors who plan their exit strategies early keep more of what they’ve earned. Tax laws change, and new strategies emerge. Eastside Estate Planning works with property owners to structure transactions that align with both immediate goals and long-term wealth building. Whether you’re managing a single rental or a diverse portfolio, the right planning makes a measurable difference in your bottom line.
