Can I Do a 1031 Tax Exchange Between States?

Can I Do a 1031 Tax Exchange

A 1031 tax exchange is a way to exchange real property without incurring capital gains tax. This enables you to exchange real estate for other property of an equal or greater value, known as a “like-kind property.” Section 1031 is a federal tax code, so you can exchange properties between states.

A state-to-state 1031 exchange involves properties located within the United States. You cannot exchange property from within U.S. borders with a property located in a foreign nation.

Most states honor the 1031 exchange and will not levy a state tax on the transaction. Some states might levy a tax on any gains in property value.

A clawback provision makes it possible for a state to tax the sale of properties in other states in lieu of deferring the capital gains tax. Some states, like California, will levy a capital gains tax on exchanged properties located in other states if you sell that property. You might exchange property in California for one in Florida. If you sell that Florida property, California would levy a tax on the transaction and so would Florida. The clawback provision means you might have to pay taxes in both states on the sale of a single property that you acquired through a state-to-state 1031 exchange.

In addition to California, other states that use the clawback provision include Montana, Oregon, and Massachusetts.

An experienced lawyer can help you know the potential tax implication of a state-to-state 1031 exchange. A lawyer can also help you identify when you might have to pay the capital gains tax.

Residential Status Affects State-to-State 1031 Exchanges

Some state requirements could affect transactions. Many states impose a withholding tax on nonresident individuals and commercial entities on qualifying properties.

The withholding tax generally ranges from about two percent to eight percent when an exchanged property’s value exceeds $100,000. Some states will impose the withholding tax on properties valued at a certain amount, and other states might tax the entire value of an exchanged property. The amount of withholding tax imposed might differ for individuals and corporations.

Some states levy a flat withholding tax that is the same for individuals and corporations. Others might require individuals to pay slightly more than corporations, and others might charge corporations more than individuals.

Limits on Properties

You cannot exchange any property via a federal 1031 exchange. There are legal requirements for determining which properties are eligible for a 1031 exchange. The properties exchanged must be like-kind and happen within 180 days. The IRS also requires individuals or corporations to provide a list of properties eligible for the exchange within 45 days of filing the paperwork to start the transaction.

The IRS does not limit how many 1031 exchanges can be done. It also does not limit how often you do a 1031 exchange.

Contact 1031 Federal Exchange For Help With a State-to-State 1031 Exchange

If you are considering a state-to-state 1031 exchange, one of our seasoned 1031 exchange advisors at the 1031 Federal Exchange can help you understand potential tax implications. Call us at 513-450-3039 or contact us online to schedule a free consultation. Located in Loveland, Ohio, we represent clients nationwide.