1031 Exchange Rules by State (2026)

Quick recap: the federal rules apply everywhere

Under IRC § 1031, you can defer capital gains tax by exchanging investment or business real estate for other like-kind real estate. The non-negotiables: identify replacement property in writing within 45 days of selling, close within 180 days, route funds through a qualified intermediary (you can never touch the proceeds), and buy property of equal or greater value with equal or greater debt to defer everything. Any cash or debt relief you receive (“boot”) is taxable. For the full walkthrough, read our 1031 exchange guide or estimate your deferral with the 1031 exchange calculator.

How state conformity works

States with an income tax generally start from federal taxable income, so when the IRS defers your gain, the state defers it too — this is “conformity.” As of 2026, every state with a broad income tax conforms to § 1031 for real estate. The last major holdout was Pennsylvania, which taxed exchange gains under its own personal income tax until Act 53 of 2022 brought it into conformity for tax years beginning in 2023. Conformity means the state tax is deferred, not erased: when the deferred gain is eventually recognized, the state where the gain was sourced can tax it — which is where clawback rules come in.

Clawback states: CA, OR, MT, MA

Four states track gain that accrued on property within their borders and tax it when it is finally recognized — even if you and the replacement property are by then in another state. California is the strictest: exchange California property for out-of-state property and you must file FTB Form 3840 every year until the deferred gain is recognized, at which point California taxes its share at rates up to 13.3%. Oregon requires similar annual reporting of deferred Oregon-source gain. Montana and Massachusetts assert the same source-based claim on deferred gain without California’s form-driven regime. Missing California’s Form 3840 filing can cause the FTB to assess the deferred tax immediately, so calendar it like a tax return — because it is one.

Withholding at closing

Separately from clawbacks, many states make the closing agent withhold estimated tax when a nonresident sells in-state property. California withholds 3.33% of the gross sales price (or an elected gain-based amount) under its Form 593 regime. New York (Form IT-2663), New Jersey (the so-called “exit tax” estimated payment), Maryland, Georgia, South Carolina, Hawaii (HARPTA), Colorado, Rhode Island, Vermont, Maine, and others run similar programs at varying rates. Because a qualifying 1031 exchange defers the gain, each of these states offers an exemption or reduced-withholding certificate for exchange transactions — but the paperwork must be in place at closing, so raise it with your qualified intermediary and escrow officer early. Withholding that does happen is a prepayment, recoverable on the state return, not an extra tax.

Full 50-state table

Rates shown are top marginal state rates on long-term real estate gains for individuals and are rounded; several states are phasing rates down year by year, so treat them as indicative and verify current-year rates with the state revenue department.

Moving between states: common scenarios

• High-tax state into no-tax state (e.g., California → Texas). Federal and state tax defer at the exchange, but California keeps its claim on the gain accrued in California via Form 3840. When you later sell the Texas property in a taxable sale, you owe federal tax plus California tax on the California-source portion. The move defers the tax; it does not erase it.
• No-tax state into high-tax state (e.g., Florida → New York). No state clawback follows you from Florida, and pre-exchange appreciation generally stays untaxed at the state level. But all future appreciation is New York-source and taxable there, and New York will withhold on a later nonresident sale unless exempted.
• Clawback state into clawback state (e.g., Oregon → California). Both states’ tracking regimes can apply to their respective slices of the gain, and you inherit annual reporting in each. Careful basis and gain-sourcing records are essential.
• Exchanging within one state. The simplest case: conformity means deferral simply flows through, no clawback tracking is triggered, and resident sellers avoid nonresident withholding entirely.

Frequently asked questions

Do 1031 exchange rules differ by state?

The core mechanics do not, IRC § 1031 is federal law, so the 45-day identification deadline, 180-day closing deadline, qualified intermediary requirement, and like-kind standard are identical in every state. What differs is state income tax treatment: whether the state taxes the gain at all, whether it recognizes the federal deferral (today, essentially all states with an income tax do), and whether it tracks and "claws back" deferred gain sourced to that state. California, Oregon, Montana, and Massachusetts are the notable clawback states, and several states impose withholding at closing on out-of-state sellers unless an exchange exemption is filed.

Which states do not tax capital gains at all?

Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming have no state income tax, so there is no state-level tax on real estate gains, deferred or not. New Hampshire taxes neither wages nor capital gains (its separate interest-and-dividends tax was fully repealed in 2025). Washington has no personal income tax and its 7% capital gains excise tax explicitly excludes real estate, though the state levies a real estate excise (transfer) tax on sales. Selling investment property in these states still triggers federal capital gains tax unless you defer via a 1031 exchange.

What is the California Form 3840 clawback?

When you exchange California property for out-of-state property, California does not forget the deferred gain. You must file FTB Form 3840 with your California return in the year of the exchange and every year afterward until the deferred gain is recognized. When you eventually sell the replacement property in a taxable sale, even decades later, even as a non-resident, California taxes the portion of gain that accrued while the property was in California, at rates up to 13.3%. Failing to file Form 3840 can prompt the FTB to assess the deferred tax immediately.

Which states have clawback rules like California?

Four states are commonly cited: California (FTB Form 3840 annual reporting), Oregon (annual reporting of deferred Oregon-source gain), Montana, and Massachusetts (which asserts tax on deferred Massachusetts-source gain recognized later by nonresidents). The common thread is source-based taxation: gain that economically accrued in the state remains taxable there when finally recognized, regardless of where the owner or the replacement property is located. Exchanging out of these states does not erase the state tax, it postpones it, and adds an annual filing obligation in California and Oregon.

Did Pennsylvania recognize 1031 exchanges?

Historically no, Pennsylvania was the last major holdout, taxing exchange gains under its personal income tax even when federal tax was deferred. That changed with Act 53 of 2022: for tax years beginning after December 31, 2022 (i.e., 2023 and later), Pennsylvania conforms to IRC § 1031 and allows deferral at the state level too. Exchanges completed before 2023 were still taxable in Pennsylvania at its 3.07% flat rate, which is why older articles list PA as a non-conforming state.

What is state withholding at closing, and how do exchanges avoid it?

Many states require the closing agent to withhold an estimated tax when a nonresident sells in-state real estate, California withholds 3.33% of the sales price (or an elected gain-based amount), and states including New York, New Jersey, Maryland, Georgia, South Carolina, Hawaii (HARPTA), Colorado, Rhode Island, Vermont, and Maine have similar regimes. Because a qualifying 1031 exchange defers the gain, these states provide exemption or reduced-withholding certificates for exchange transactions, for example California's Form 593 exemption and New York's IT-2663 exchange exemption. The paperwork must usually be completed at or before closing, so coordinate with the qualified intermediary early.

What happens if I exchange property from a no-tax state into a high-tax state?

Direction matters. Exchanging from Texas (no state income tax) into California defers federal gain, and the Texas-era gain is generally not taxed by California when you later sell, but appreciation after the property becomes California property is fully taxable there, and you now own an asset in a high-tax, clawback-tracking state. The reverse trade, exchanging out of California into Texas, keeps the accrued California gain on California's books via Form 3840. In short: a 1031 exchange changes where future appreciation is taxed, but source states with clawback rules keep their claim on past appreciation.

Do the federal 45-day and 180-day deadlines ever change by state?

No. The 45-day identification window and 180-day exchange period are federal rules that apply identically everywhere, measured from the closing of the relinquished property (with the 180 days capped at your tax return due date, including extensions). The only adjustments come from the IRS itself, which occasionally extends deadlines for federally declared disasters, those extensions are geographic but stem from federal relief notices, not state 1031 law. State rules never shorten or lengthen the exchange timeline.

Does a 1031 exchange defer the federal Net Investment Income Tax and depreciation recapture too?

Yes. A fully qualifying exchange defers regular federal capital gains tax, the 3.8% Net Investment Income Tax, and depreciation recapture (taxed at up to 25% when recognized), along with conforming state income tax. All of these spring back if you receive boot, cash or debt relief, or if the exchange fails its deadlines. This is why partial exchanges can still produce surprising tax bills: boot is taxed first against recapture and gain even though most of the transaction deferred.

Can I do a 1031 exchange into fractional real estate?

Only certain structures qualify. Direct deeded co-ownership (tenancy-in-common interests meeting IRS Rev. Proc. 2002-22 guidelines) and Delaware Statutory Trust (DST) interests structured under Rev. Rul. 2004-86 are widely used as 1031 replacement property. Interests in an LLC or partnership, the structure most fractional platforms, including Lofty, use, are personal property, not real property, so they generally do not qualify as like-kind replacement property. Investors who want passive fractional exposure after cashing out typically complete or skip the exchange, then invest proceeds separately. Confirm any structure with a qualified intermediary and tax advisor before relying on it.

Sources

• IRS, Like-Kind Exchanges (Real Estate Tax Tips)
• IRS, Form 8824, Like-Kind Exchanges
• California FTB, Form 3840, California Like-Kind Exchanges

Related Lofty resources

• 1031 exchange guide — the full federal playbook: deadlines, boot, and structures.
• 1031 exchange calculator — estimate your deferred tax and reinvestment requirements.
• Landlord-tenant laws by state — know the rules where your replacement property sits.