Should You Sell Your Rental Before 2025 Tax Changes?

Should You Sell Your Rental Before 2025 Tax Changes?

What Eastside landlords should know about capital gains, depreciation recapture, and 1031 exchange timing

If you own a rental property in the Seattle or Eastside area, it might be time to revisit your exit strategy before upcoming tax adjustments and shifting market conditions take hold in 2025. Even though Washington State’s capital gains tax doesn’t typically apply to real estate sales, federal tax rules on investment property gains and depreciation recapture can still have a major impact on your net proceeds.

1. Washington State Capital Gains Tax

Washington’s 7% capital gains tax applies primarily to non-real-estate assets. However, a 2025 update (Senate Bill 5813) will raise the rate to 9.9% on gains above $1 million for high earners. Fortunately, sales of real estate are exempt from this state tax, which means your rental sale won’t be affected — but any sale of partnership interests or REIT shares could be.

2. Federal Taxes Still Apply: Capital Gains + Depreciation Recapture

Selling a rental property can trigger two major forms of federal taxation:

• Capital Gains Tax: You’ll owe tax on the appreciation between your property’s adjusted basis and sale price. Federal long-term capital gains rates currently range from 15% to 20%, depending on your income level.

• Depreciation Recapture: Because you’ve likely deducted depreciation over time, the IRS “recaptures” that benefit upon sale. This portion is taxed at up to 25%, separate from your capital gains rate.

Even in a favorable market, those combined taxes can reduce your profit significantly — so planning ahead matters.

3. The 1031 Exchange Advantage

A 1031 Exchange allows investors to sell a rental and reinvest the proceeds into another “like-kind” property without immediately paying capital gains or depreciation recapture taxes. To qualify:

• You must identify your replacement property within 45 days of selling your current one.

• You must close on that property within 180 days.

• The new property must be of equal or greater value and held for investment or business use.

This is a popular move among Seattle and Eastside investors seeking to preserve equity while repositioning into higher-yield assets — for example, trading an older Bellevue rental for a newer Snohomish County duplex or short-term rental.

4. What Landlords Should Evaluate Now

Before the new tax year, consider running a full tax scenario with your CPA or advisor. Look at:

• Your current adjusted basis and total depreciation taken.

• The estimated tax bill if you sell now versus holding.

• Whether a 1031 Exchange fits your investment goals.

• Local market timing — Eastside rental values remain strong, but listing inventory is rising and average Days on Market have stretched beyond 35 in many neighborhoods.

For some owners, selling before spring may lock in a stronger resale price and simplify tax planning before further legislative changes in 2025.

Bottom Line

Washington landlords won’t see major new real estate–specific taxes next year, but federal capital gains and depreciation recapture rules still carry weight. Whether you choose to sell, hold, or exchange, the smartest move is to get ahead of 2025 by evaluating your equity position and timing your next step before potential changes take effect.

🧾 Sources

• Washington Department of Revenue – Capital Gains Tax Overview

• Perkins Coie LLP – Washington 2025 Tax Changes (SB 5813)

• Universal Pacific 1031 – Washington Capital Gains Tax on Real Estate

• Realized1031 – Depreciation Recapture Explained

• Investopedia – 1031 Exchange Rules and Deadlines

• TurboTax – How a 1031 Exchange Works