How a 1031 exchange changes from state to state

The mechanics of a 1031 exchange are federal, so the core rules are the same wherever your property sits. You have 45 days to identify replacement property and 180 days to close, a qualified intermediary must hold the proceeds, the replacement must be like-kind real estate held for investment or business, and the same taxpayer that sold must acquire. What changes from one state to the next is the state tax layer that sits on top of the federal one. That layer is the reason a 1031 exchange in California looks very different from one in Texas, and it is what each of the state guides above explains in detail.

The four things that vary by state

State conformity. Most states follow Section 1031, so a properly structured exchange defers the state tax along with the federal tax. A few have wrinkles worth knowing before you sell. Pennsylvania, for example, only began recognizing 1031 exchanges for individuals in 2023.

The state capital gains rate. This is the widest variable. Nine states have no income tax at all, so the only tax you defer is federal. At the other end, California taxes the gain as ordinary income at rates up to 13.3%, the highest in the country. In between, some states tax the gain as ordinary income, while others offer partial capital gains deductions or exclusions that lower the effective rate. Missouri has gone furthest, recently exempting individuals' capital gains from state tax entirely.

Nonresident withholding. Many states require the closing agent to withhold a percentage from an out-of-state seller and send it in as a prepayment of state tax. In a 1031 you can usually avoid that withholding, but only if you file the right exemption form before closing. Miss it and the cash is held back and reclaimed later on your return, which can disrupt the funds your intermediary needs to buy the replacement property.

The clawback. Four states, California, Oregon, Massachusetts, and Montana, treat the gain that accrued while a property sat in the state as theirs, even after you exchange into another state. The deferral still works, but those states keep their claim on the in-state gain and expect an annual filing until you eventually sell without exchanging again.

States with no income tax

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming impose no state income tax, so a 1031 there defers federal tax only. That does not mean state factors disappear: property taxes, transfer taxes, and insurance costs vary widely and belong in your underwriting. Washington is a useful example, because its capital gains tax specifically excludes real estate, so a property sale is not subject to it.

Which state's rules apply to your exchange?

The state tax consequences attach to the sale, so they are governed by the state you are selling in, not the state you move to or buy in. Selling in a high-tax or clawback state and reinvesting somewhere with no income tax does not erase the origin state's claim on the gain that built up there. A 1031 lets you reinvest anywhere in the United States, which is why so many investors exchange out of high-tax states into lower-tax ones, but the origin state still decides what you owe and what you must file.

Work with a qualified intermediary in any state

We act as qualified intermediary for exchanges in every state, hold your proceeds in segregated accounts, and coordinate the state-specific steps, the withholding exemption at closing and the clawback filing where it applies, alongside the federal exchange. Select your state above to read its full guide, or contact our team to start your exchange.

Frequently asked questions

Do state taxes affect a 1031 exchange?

Yes. The federal rules are uniform, but each state sets its own capital gains rate and nonresident withholding, decides whether it conforms to Section 1031, and decides whether it applies a clawback. Those differences determine how much tax you defer and what you have to file.

Which states have a 1031 exchange clawback?

California, Oregon, Massachusetts, and Montana. If you exchange property out of one of these states and later sell the replacement in a taxable transaction, the state taxes the gain that accrued while the property was located there.

Do I pay state tax if I exchange into a no-tax state?

Your future income and the eventual sale in a no-income-tax state are not taxed by that state, but the state you sold in still governs the gain that accrued there. A clawback state in particular keeps its claim even after you move.

Can I exchange property from one state into another?

Yes. A 1031 allows reinvesting in like-kind real estate anywhere in the United States. Only the state tax treatment changes; the federal deferral works the same way.

This page is general information, not tax or legal advice. We act as a qualified intermediary and do not provide tax or legal advice. State and federal rules and thresholds change; confirm current figures with your tax advisor.