Which States Recognize 1031 Exchanges? (All 50, With the Exceptions That Matter)
'Does New Jersey recognize 1031 exchanges?' 'Does Hawaii?' The answer to every version of this question is yes. Where states actually differ is in three narrower things: whether they claw back the deferral later, whether they withhold at closing, and whether they tax the gain at all.
- All 50 states and D.C. recognize Section 1031 deferral for state income tax. Pennsylvania, the last holdout, conformed for tax years beginning after 2022.
- Eight states have no tax on the gain to begin with: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Wyoming, and Washington (whose capital gains tax exempts real estate). New Hampshire taxes only interest and dividends.
- California, Oregon, Montana, and Massachusetts track deferred gain that leaves the state and tax it when you eventually sell for cash.
- Many states withhold estimated tax from nonresident sellers at closing. Exchanges are exempt if you file the right form before closing.
Conformity: every state says yes
State income taxes generally start from federal taxable income or federal adjusted gross income, so a gain deferred federally under §1031 is deferred for state purposes automatically. For decades Pennsylvania was the exception: it taxed exchanges as sales under its own personal income tax. Act 53 of 2022 changed that, and Pennsylvania has conformed for tax years beginning on or after January 1, 2023. Today there is no state that taxes a properly executed exchange in the year it happens.
Specific states people ask about most: New Jersey recognizes exchanges (its 'exit tax' is an estimated-tax prepayment, not a separate tax, and exchanges are exempt with Form GIT/REP-3). Hawaii recognizes them (HARPTA withholding is waived with Form N-289). New York recognizes them (nonresidents file IT-2663 and check the exchange exemption). Each state's details are on its state page.
The no-tax states
If the property is in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, or Wyoming, there's no state income tax on the gain at all; the exchange defers only the federal layers. Washington has a capital gains tax since 2022 but it exempts real estate. New Hampshire taxes only interest and dividends. These states are popular destinations for exchanges because a gain that migrates there and is eventually recognized there faces no state tax, unless the origin state has a clawback. Rates for the other 42 are in the state tax rate table.
The clawback states
Four states don't let deferred gain leave quietly. California requires an annual information return (FTB 3840) for as long as the deferred gain is outstanding and taxes the California-sourced portion when you sell for cash, wherever you then live. Oregon (Form OR-24), Montana, and Massachusetts have similar tracking or clawback regimes. The mechanics and the strategies around California's version are in how California's clawback works. In every other state, exchanging out is the end of that state's claim on the gain.
Withholding at closing
Separately from conformity, roughly a dozen states require withholding of estimated tax from nonresident (and sometimes all) sellers at closing: California (3⅓% of price), Hawaii (7.25%), New Jersey, New York, Maryland, South Carolina, Georgia, Colorado, Vermont, Rhode Island, West Virginia, and Maine among them. All exempt exchanges, but the exemption is claimed on a form at or before closing. File it late and the state holds your money until you file a return. This is a checklist item, not a conformity problem; the pre-closing sequence is in the out-of-state exchange guide.
Local quirks worth knowing
- New York City residents pay city income tax on gains in addition to state; both defer with the exchange.
- Philadelphia and some other cities have local taxes on real estate gains or transfers that operate independently of §1031.
- Transfer and mansion taxes (New York, New Jersey, Pennsylvania, D.C., Washington state, and others) apply to the deed transfer itself and are not deferred; budget them on both sides of the exchange.
- State forms. Beyond the federal Form 8824, California, Oregon, and a few others want their own exchange schedules. Ask your CPA which apply in both the origin and destination state.
Frequently asked questions
Does every state recognize 1031 exchanges?
Yes. All 50 states and D.C. conform to Section 1031 for state income tax purposes. Pennsylvania was the last to conform, effective for tax years beginning in 2023.
Does New Jersey recognize 1031 exchanges?
Yes. New Jersey defers the gain along with the federal deferral. Its so-called exit tax is an estimated-tax prepayment for nonresident sellers, and exchanges are exempt using Form GIT/REP-3 at closing.
Does Hawaii recognize 1031 exchanges?
Yes. Hawaii conforms to Section 1031. Its HARPTA withholding of 7.25% on nonresident sellers is waived for exchanges by filing Form N-289 before closing.
Which states have a 1031 clawback?
California, Oregon, Montana, and Massachusetts track gain deferred on property that leaves the state and tax it when the replacement property is eventually sold for cash.
Exchanging in a state with withholding or clawback rules?
The forms are due before closing. I'll make sure the right ones are on your checklist for both states.
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