1031 Exchange & DST Investing in Washington, D.C.
The District of Columbia taxes top capital gains at 10.75% and conforms to federal Section 1031, so a qualifying exchange defers a substantial combined tax burden. D.C. has no separate nonresident real estate withholding tied to income tax.
State tax treatment of a 1031 exchange
The District of Columbia conforms to federal Section 1031, so a qualifying like-kind exchange defers District income tax on the gain. Capital gains are taxed as ordinary income, with a top marginal rate of 10.75% at the highest income levels.
The District does not impose a separate clawback on gain deferred in a prior exchange and does not have a general nonresident real estate withholding tied to the income tax. Because tax is deferred rather than eliminated, the gain carries into the basis of the replacement property.
Market snapshot
Washington, D.C. real estate is shaped by the federal government and related professional services, with a large office market that has faced post-pandemic vacancy and a growing wave of office-to-residential conversions. Multifamily remains a comparatively resilient asset class supported by durable rental demand.
Apartments and mixed-use assets draw the most 1031 replacement interest, while distressed or transitioning office presents value-add opportunities. High valuations and a high exit-tax rate lead many District owners to look toward passive, out-of-jurisdiction alternatives.
Why 1031 & DST investors look here
- A 10.75% top rate plus federal capital gains and net investment income tax creates a heavy exit-tax burden in the District
- Owners facing office-market disruption often want to reposition equity into more stable passive assets
- DST and 721 structures let District owners diversify out of a single property and simplify estate planning
Replacement-property options
A District of Columbia exchange does not require replacement property in D.C., which appeals to owners wanting to move equity into other markets. Accredited investors commonly identify DST interests, 721 UPREIT contributions, or Opportunity Zone investments elsewhere, trading a hands-on District property for diversified, professionally managed real estate. These vehicles are illiquid, carry market and sponsor risk, and are available only to accredited investors.
Frequently asked questions
Does Washington, D.C. tax a 1031 exchange?
No. The District conforms to federal Section 1031, so a qualifying like-kind exchange defers District income tax on the gain along with the federal tax.
Can I exchange D.C. property for out-of-state DSTs?
Yes. Section 1031 does not require replacement property in the District, so a D.C. property can be exchanged into DST interests holding real estate in other states, subject to accredited-investor eligibility.
Does Washington, D.C. withhold tax when a nonresident sells real estate?
No. The District does not impose a general nonresident real estate withholding tied to income tax, though nonresident sellers may still have District filing obligations on any recognized gain.
Gerald F. “Jerry” Baker, III — Founder & Managing Principal, Baker 1031 Investments · FINRA Series 22 / 63 · SIE. Read full bio →
State tax treatment is general and changes frequently; this page is educational and is not tax, legal, or investment advice. Confirm current state and local rules with your own CPA and attorney. Securities offered through Aurora Securities, member FINRA/SIPC. Real estate investments involve risk, including possible loss of principal.