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State 1031 Exchange Requirements

 

State 1031 RequirementsAll states recognize the Federal 1031 exchange tax code permitting the deferral of capital gain at the state income tax level. Those states that do not observe the Federal statute require the Taxpayer pay a state income tax on the gain in addition to the potential of paying tax on the sale out of state replacement properties.

This implies that the old or relinquished property can be exchanged in an income tax state for a new or replacement property in a non income state. If the titleholder of the old property is a non resident, the replacement property in the non income state will not be liable to the first state’s income tax effectively bypassing the state’s income tax.

Clawback Requirements

Some states like Oregon have a “clawback” clause that triggers a tax on the old Oregon property when the new out of state replacement property is sold. The Oregon Department of Revenue requires those Taxpayers exchanging for out of state replacement properties to file an annual report to track the eventual sale and tax disposition. California does the same and requires nonresident Taxpayers to file a nonresident income tax return in the year the replacement property is sold. 

Montana and Massachusetts have clawback provisions for nonresidents who have exchanged instate properties for out of state replacement properties. If the replacement property state has a state capital gains income tax, the Taxpayer could be taxed twice.

1031 State Form Requirements

As a nonresident titleholder of real property in

California Form 593-C;
Colorado Form DR1083;
Georgia Form IT-AFF3;
Hawaii Form N289;
Maine Form REW-5;
Maryland Form MW506AE;
New Jersey Form GIT/REP-3;
New York Form NC-1099NRS;
Rhode Island Form RI Form 71.3;
South Carolina Form I-295;
Vermont Form RW-171;

a withholding tax is required much like the Foreign Investment Real Property Tax Act of 1980 (FIRPTA). Like FIRPTA, the states may have a withholding certificate exempting 1031 exchanges. Seek counsel from your financial or legal advisor.

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Comments

I thought Pennsylvania does not recognize 1031 exchanges. Also, which states require the replacement property be located in the same state? Is there a master list out there?
Posted @ Sunday, February 16, 2014 11:12 AM by Yale
You are correct, an income tax of 3.07% is due to the Commonwealth of Pennsylvania for residents and non-residents who complete a 1031 exchange on property located in Pennsylvania. Governor Tom Corbett's 2014 - 2015 budget includes a 1031 exchange version. 
 
Taxpayers subject to PA Personal Income Tax (PIT) who have initiated a 1031 exchange can now claim tax-free treatment for PIT purposes. In PA PIT Bulletin 2006-07 (Oct 20, 2006) PA Dept of Revenue states a taxpayer, for PIT purposes, may defer gain on a like-kind exchange if permitted by taxpayer's method of accounting. 
 
I am not aware of any states that require the replacement property be located in the same state as the relinquished property.  
 
Good questions.
Posted @ Sunday, February 16, 2014 11:51 AM by Andy Gustafson
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