1031 Exchanges I Jackson Hole, WY

1031 Exchanges – Trading from One State to Another

We are often asked the question, “Can I sell property in one state and buy property in a different state in a 1031 exchange?”

The answer is yes, it is possible to trade into property located in another state.  Under Internal Revenue Code Section 1031, real estate located in one U.S. state is like kind to real estate located in any other state, and you can trade from one state to another.  In most cases you are able to defer both federal and state tax, assuming the state has an income tax.  Taxpayers doing exchanges with properties in Pennsylvania or Vermont should consult with their tax advisors, since those states have some rules that differ from the federal 1031 rules. 

In addition, some states take the position that tax that is deferred to a property in another state is eventually due once the investor cashes out.  For example, if you sell property in California and buy property in Florida, which doesn’t have state income tax, you will still owe state tax to California if you sell the Florida property without doing another 1031 exchange. 

California goes one step further and requires investors to file an information return in the year they trade out of state and each year thereafter, so that the Franchise Tax Board can keep track of the transaction and make sure the tax is paid once the investor sells without doing an exchange. 

Many states have withholding requirements when an out of state investor sells property.  Typically, these rules require the closer to withhold a percentage of the proceeds and remit them to the taxing authority as a type of security or deposit on the tax that will be paid once a tax return is filed.  Some states have exceptions to withholding if you do an exchange, and different states have different requirements for paperwork and timing to take advantage of this exception to withholding. 

Although you can trade into any state in the U.S., you cannot trade from the U.S. into property outside of the U.S.  Under Section 1031, domestic and foreign properties are not like kind.  Nevertheless, if you stay within the U.S., you have a lot of flexibility and should be able to use a 1031 exchange to have geographical diversity in your portfolio.