1031 Exchange & DST Investing by State
How a 1031 exchange works in your state — state tax treatment, market conditions, and the replacement-property options accredited investors are using across all 50 states and the top U.S. metros.
Why State Tax Treatment Changes the Math
Section 1031 is federal law, but the tax you actually pay on a sale is federal and state. Nearly every state with an income tax conforms to Section 1031, so a properly structured exchange defers the state gain along with the federal one. The differences that matter show up in three places: the rate you would owe if the exchange failed, whether the state expects to be repaid if you exchange out of state, and whether the closing agent has to withhold cash at settlement.
Rates run from nothing to 13.3%. Eight states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming — levy no state income tax on real estate gains at all, so only the federal exposure is in play. At the other end, a California seller can face a 13.3% state rate stacked on top of federal capital gains, depreciation recapture, and the 3.8% net investment income tax. That spread is often the single largest variable in whether an exchange is worth doing.
Clawback States and Nonresident Withholding
Four states — California, Massachusetts, Montana, and Oregon — operate a clawback. If you exchange out of the state into replacement property elsewhere, the state still claims the deferred gain and requires an annual information filing (California’s FTB Form 3840, Oregon’s Form 24) until you eventually recognize it. The exchange is still valid and the deferral still works; the obligation is to keep filing so the state can collect if you ever cash out.
Separately, roughly a dozen states require the closing agent to withhold a percentage from a nonresident seller — 3.33% in California, 7.25% under Hawaii’s HARPTA, 8.75% for nonresident individuals in Maryland. A properly documented 1031 exchange generally exempts you, but the exemption has to be claimed at closing with the right form. Miss it and you are waiting on a refund rather than deploying the money into replacement property.
How to Use These State Pages
Each page below covers one state or metro: the capital-gains rate, whether it conforms to Section 1031, whether a clawback applies, what withholding to expect, current market conditions, and the replacement-property options investors in that state are using — including DSTs, 721 UPREIT exchanges, and Opportunity Zone funds. Because DST interests are available nationwide, the state you sell in does not limit where you can reinvest: a California or New York seller can exchange into Sun Belt industrial or Midwest net lease without leaving the deferral behind.
Start with the state where the relinquished property sits — that is the one that governs the tax on the sale — then look at the metro pages for the markets you are considering as replacement property.