1031 Exchange Across State Lines
Yes — you can sell investment real estate in one state and buy replacement property in another, and the 1031 exchange still defers your federal capital gains tax. Federal law treats U.S. real property held for investment or business use as like-kind to other U.S. real property regardless of which state it sits in. What changes when you cross a state line is the state tax picture: the state you’re leaving may withhold money at closing, may require an annual information return for years afterward, and — in four states — formally claims the right to tax your deferred gain whenever you finally cash out, even if you’ve long since moved the money elsewhere.
Federal rules don’t care about state lines
Section 1031 is federal law, and nothing in it distinguishes between states. Under IRC §1031(a), no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment for like-kind real property. “Like-kind” refers to the nature or character of the property, not its grade, quality, or location within the United States (Treas. Reg. §1.1031(a)-1(b)). A rental duplex in Ohio is like-kind to farmland in Texas or an office condo in Florida.
The one geographic line that does matter is the national border: under IRC §1031(h), real property located in the United States and real property located outside the United States are not like-kind to each other.
Everything else about the federal exchange works identically interstate:
- The 45-day identification and 180-day closing deadlines run concurrently from the transfer of the relinquished property, with no extensions for weekends or holidays (only federally declared disasters per IRS notices). Model your dates with the 1031 exchange calculator.
- You still need a qualified intermediary under the safe harbor in Treas. Reg. §1.1031(k)-1 — one QI can handle both sides of an interstate exchange; see our guide to 1031 exchange companies.
- You report the exchange on IRS Form 8824 either way.
For the basic mechanics of exchanging into a different state, see can you do a 1031 exchange in a different state. This article covers the layer most investors miss: what the states do.
What actually changes when you exchange interstate
Most states with an income tax conform to federal §1031, so the state-level gain is deferred too. But the state where your relinquished property sits doesn’t lose its claim just because the money left. Three state-level mechanisms come into play:
- Source taxation. Gain from real estate is generally taxable by the state where the property is located (“source” state), even for nonresidents. Deferral postpones that tax; it doesn’t reassign it.
- Nonresident withholding at closing. Many states require the buyer or escrow to withhold a slice of the sale price when the seller is a nonresident — with an exemption or reduction if the sale is part of a 1031 exchange.
- Clawback and reporting rules. Four states have formal rules asserting tax on the deferred gain when it’s eventually recognized, and two of them require annual filings to track it.
State rules vary widely — see the 1031 exchange rules by state hub for individual state guides.
The four clawback states: CA, OR, MT, MA
A “clawback” rule says: gain that accrued while the property was in our state remains our source income, and when you eventually recognize it — even by selling an out-of-state replacement property years later — you owe us tax on it. Four states have express provisions:
| State | Authority | Annual filing? | What it says |
|---|---|---|---|
| California | R&TC §§18032, 24953; FTB 3840 instructions | Yes — Form FTB 3840 | Exchange CA property for out-of-state property and you must file FTB 3840 for the year of the exchange and every year after, until the CA-source deferred gain is recognized on a California return |
| Oregon | ORS 316.738; Form OR-24 instructions | Yes — Form OR-24 | File OR-24 for the year of the exchange and annually thereafter until you dispose of the replacement property; Oregon-source deferred gain is taxed when recognized |
| Montana | Mont. Admin. R. 42.2.308 | No annual form | Gain realized on relinquished Montana property “retains its Montana source income character” and must be reported if and when the gain is recognized for federal purposes |
| Massachusetts | 830 CMR 62.5A.1 | No annual form | Deferred gain isn’t taxed at exchange, but when the replacement property is later disposed of, the portion of gain reflecting appreciation of Massachusetts real estate is Massachusetts source income |
A few practical points on the clawback rules:
- California’s is the most aggressive administratively. For exchanges in taxable years beginning on or after January 1, 2014, FTB 3840 is required every year — and the obligation continues even if you exchange the replacement property again in a later 1031 exchange. If you stop filing, the Franchise Tax Board can estimate your income and assess tax, penalties, and interest.
- Montana caps the clawback at your federal recognized gain. Under Rule 42.2.308, the Montana-source income you eventually report never exceeds the gain you recognize federally — so if the replacement property loses value, the state claim shrinks with it.
- Chained exchanges keep the claim alive. In all four states, rolling the replacement property into another exchange defers the state claim again; it doesn’t extinguish it.
- Whether these states can successfully collect from a taxpayer with no remaining connection to the state is a practical enforcement question — but the filing obligations (CA and OR) are real, and skipping them creates a paper trail of noncompliance.
Nonresident withholding at closing — and the exchange exemption
Separate from clawback, many states make the closing agent withhold estimated tax when a nonresident sells property in the state. Most of these regimes exempt or reduce withholding for a qualifying 1031 exchange, but the exemption is almost never automatic — someone has to file the right certificate before closing. Examples from official sources:
| State | Baseline withholding | 1031 exchange treatment |
|---|---|---|
| California | 3 1/3% of the sales price (Form 593) | Exempt at the initial transfer if part of a deferred like-kind exchange; if you receive boot over $1,500, the QI withholds on it, and if the exchange fails, the QI must withhold 3 1/3% of the sales price |
| Hawaii | 7.25% of the amount realized (HARPTA) | Seller certifies on Form N-289 that the gain is not recognized under the IRC (which covers a 1031 exchange) |
| Georgia | 3% of the purchase price (O.C.G.A. §48-7-128; Reg. 560-7-8-.35) | Exempt to the extent the exchange income is not subject to federal or Georgia income tax |
| New York | Estimated tax prepayment via Form IT-2663 | Nonresident seller indicates the §1031 exchange on the form; no payment is due on the deferred portion (see our New York guide) |
If withholding does happen (for example, the paperwork was missed), the money isn’t lost — it’s a prepayment you recover as a credit on that state’s nonresident return. But it’s cash pulled out of your exchange, which can create taxable boot, so getting the exemption certificate filed before closing matters.
Moving to a no-income-tax state doesn’t erase the old state’s claim
A popular interstate strategy is “swap till you drop” toward a state with no personal income tax. For 2025, nine states levy no personal income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming (New Hampshire’s last remnant, the interest and dividends tax, was repealed effective January 1, 2025; Washington has a capital gains excise tax, but it does not apply to real estate sales).
Exchanging into one of these states means future appreciation escapes state income tax. But it does not wipe out gain that accrued in a clawback state:
Hypothetical illustration (round numbers, not a real transaction): An investor exchanges a California rental with $300,000 of deferred gain into a Texas property. Texas levies no income tax, and the investor files FTB 3840 each year. Five years later they sell the Texas property outright for a total gain of $400,000. Federally, the whole $400,000 is taxable that year. California taxes the $300,000 of California-source deferred gain on a nonresident return; the $100,000 of Texas-era appreciation is not California’s. Had the investor instead kept exchanging and held until death, heirs would generally take a stepped-up basis under IRC §1014 — which is how the deferred federal and state claims can ultimately disappear.
For states without an express clawback rule, most simply conform to federal deferral and have no tracking mechanism once the money leaves — but sourcing law still varies, so confirm the exit-state rules in our state-by-state guides and with your tax advisor.
Practical checklist for an interstate 1031 exchange
- Confirm both properties qualify federally — real property held for investment or business use on both ends; see what qualifies for a 1031 exchange.
- Check the exit state’s withholding rule early. Ask the closing agent which certificate (e.g., CA Form 593, HI Form N-289, GA affidavit, NY IT-2663/TP-584) must be filed before closing to claim the exchange exemption.
- Ask whether the exit state is a clawback state. Leaving California or Oregon means an annual filing (FTB 3840 / OR-24) until the gain is recognized; leaving Montana or Massachusetts means tracking the deferred state-source gain yourself.
- Verify the destination state’s treatment. Most income-tax states conform to §1031; confirm on the state’s guide before you count on state deferral of future gain.
- Use one qualified intermediary for both legs and make sure exchange funds never touch your hands — constructive receipt kills the exchange under Treas. Reg. §1.1031(k)-1.
- Calendar the federal deadlines — 45 days to identify (3-property, 200%, or 95% rule) and 180 days to close, or your return due date with extensions if earlier.
- Keep a deferred-gain file per state: closing statements, Form 8824s, and each year’s state information returns, so the state-source amounts are provable decades later.
Frequently asked questions
Yes. Section 1031 is federal law, and all real property located in the United States held for investment or business use is like-kind to other U.S. real property, regardless of state. The only geographic restriction is national: under IRC §1031(h), U.S. property and foreign property are not like-kind to each other.
Usually not at the time of the exchange — most states with an income tax conform to federal §1031 and defer the state gain too. But the state where the sold property sits keeps a source-tax claim on that gain. Four states (California, Oregon, Montana, Massachusetts) have express clawback rules taxing the deferred gain when you eventually recognize it, and many states withhold at closing unless you file an exchange exemption certificate.
California, Oregon, Montana, and Massachusetts. Each asserts that gain accrued on property in the state remains state-source income and is taxable there when finally recognized — even if the replacement property is elsewhere. California (Form FTB 3840) and Oregon (Form OR-24) also require annual information returns until the deferred gain is recognized.
Not on the gain that accrued in California. You must file Form FTB 3840 every year, and when you eventually sell the Texas property in a taxable sale, California taxes the California-source deferred gain on a nonresident return. Only appreciation that occurs after the property is in Texas escapes state income tax — unless you keep exchanging and hold until death, when heirs generally receive a stepped-up basis under IRC §1014.
Many states require it — for example, California withholds 3 1/3% of the sales price and Hawaii 7.25% of the amount realized — but most exempt qualifying 1031 exchanges if the correct certificate (CA Form 593, HI Form N-289, etc.) is filed before closing. If withholding happens anyway, you recover it as a credit on that state's nonresident tax return.
This article is for educational purposes only and is not legal or tax advice. State conformity, withholding, and clawback rules change and vary by situation; consult a qualified tax professional or attorney licensed in the relevant states before structuring an interstate exchange.
Primary sources: IRC §1031 (Cornell LII) · Treas. Reg. §1.1031(a)-1 (Cornell LII) · Treas. Reg. §1.1031(k)-1 (Cornell LII) · California FTB, Reporting Like-Kind Exchanges (FTB 3840) · FTB Form 593 Instructions · Oregon Form OR-24 Instructions · ORS 316.738 · Mont. Admin. R. 42.2.308 (Cornell LII) · 830 CMR 62.5A.1 (Mass.gov) · Hawaii DOT, HARPTA · NY Form IT-2663 Instructions · WA DOR, Capital Gains Tax · NH DRA, I&D Tax Repeal
Related reading
- 1031 exchange new york state: Complete 2025 Guide
- Can you do a 1031 exchange in a different state: Complete 2025 Guide
- 1031 b exchange: Complete 2025 Guide
- 1031 deferred exchange: Complete 2025 Guide
- 1031 exchange 1 property for 2: Complete 2025 Guide
- What is a 1031 exchange? Rules, timeline & how it works