Do 1031 Exchange regulations vary by state, or is it federal legislation?

Question

Curious if 1031 Exchange laws vary by state, or if it is just federal legislation. Thanks!

Alex Olson · Answer

@Tj Collins You can 1031 exchange in and out of any state, you can 1031 exchange in and out of any investment real estate - farm land, apartments, commercial, single family investments, new construction etc...The big things are timing on the 45 day window, 3 property rule and closing in a certain amount of time. @Dave Foster Can definately help. If you want to look at a cash flowing market like the midwest here in KC, I can show you some data points around this part of the country.

Dave Foster · Answer

@Tj Collins, The differences between states is limited to reporting of the sales at this time. PA used to not exempt from state tax. But they do now. In a few of the states there is either a form. you must sign or an application that your escrow closer must file in order to exempt from any state taxes or withholdings that might normally be collected at sale . These can change as fast as a new legislature wants a new highway. So your escrow closer is your best go to for that.

But the mechanics of the 1031 will be identical in all states.

Mike Fingleton · Answer

Hey TJ!

Great question! While 1031 exchanges are governed by federal law, some states have their own nuances that can impact your transaction. For instance, states like California, Oregon, Montana, and Massachusetts have "clawback" provisions, meaning they may tax deferred gains if you eventually sell the replacement property and don't reinvest within the state.

In my experience, it's crucial to be aware of these state-specific rules to avoid unexpected tax liabilities. I once had a client who sold a property in California and used a 1031 exchange to purchase in Arizona, thinking they were in the clear. A few years down the line, they were surprised by California's tax bill due to the state's clawback provision. We managed to navigate it, but it was a lesson in the importance of understanding both federal and state regulations.

Given your location in Boston, Massachusetts, it's especially pertinent to consult with a qualified intermediary or tax professional familiar with both federal and Massachusetts state laws to ensure a smooth exchange process. They can provide guidance tailored to your specific situation and help you navigate any state-specific requirements.

If you're considering investments in other states, like Arizona or Texas, it's worth noting that some states, such as Texas, don't have a state income tax, which can simplify the process.

Remember, while the federal framework provides the foundation for 1031 exchanges, state-specific nuances can significantly impact your investment strategy. It's always best to consult with professionals who can provide guidance tailored to your specific situation.

Best of luck with your investments!

Pat & JasperTurning investment visions into REALITY in Phoenix, AZ - Ranked #1 for residential real estate growth and opportunity by PwC

Bill B. · Answer

It is a federal regulation but some states reach out and screw you. Mostly California but at least one east coast state in famous for it as well.

Use a reputable expert like @Dave Foster and you’ll be covered. Not sure if his new book covers which states have exceptions to the rule but reach out to him.

Bill B. · Answer

There you go. PA was the other anomaly I was thinking of. I know California is still famous for clawing back the taxes owed eventually on a 1031, I don’t know if they are the only state that does it. But it seems like a very Californiay kinda thing to do.

Turns out google IS your friend…

Four states – California, Oregon, Montana, and Massachusetts – have what's known as clawback provisions. These states impose a state tax on any realized gains from the sale of investment properties.

Tj Collins · Answer

Cool thanks! Which east coast state are you referring to?

Do 1031 Exchange regulations vary by state, or is it federal legislation?

Do 1031 Exchange regulations vary by state, or is it federal legislation?

Most Popular Reply

6 Replies