Virginia 1031 Exchange State Tax Guide
Quick answer
Virginia generally follows federal 1031 deferral through its income-tax starting point. For individuals, Virginia Form 760 starts with federal adjusted gross income, and Virginia Tax has described Virginia as a conformity state that starts the Virginia taxable income computation with FAGI. If your 1031 exchange defers gain federally, the deferred gain generally does not become a separate Virginia income item just because the relinquished or replacement property sits in Virginia.
That does not mean every Virginia exchange has zero state tax work. You still report the exchange federally on Form 8824. Any recognized gain, such as gain from cash or non-like-kind property, can flow through the federal return into Virginia’s FAGI-based calculation. Virginia also has separate recordation-tax rules for real estate instruments, and Virginia residents may need to examine credit and basis issues when another state taxed the same gain in a different year.
Use this as a filing map, not a substitute for Virginia tax advice. The core question is: what did the federal return recognize, and does Virginia have a specific adjustment, credit, filing duty, or real estate transfer tax issue that changes the state result?
Virginia conformity map
Virginia conformity starts with Code of Virginia § 58.1-301. The statute says terms used in the Virginia income-tax chapter generally have the same meaning as comparable federal income-tax terms unless Virginia law clearly requires a different meaning. The current conformity date in the statute is December 31, 2025, with the listed exceptions in Virginia law.
Virginia Tax Bulletin 26-1 explains the same point for 2025 Virginia income-tax returns: Virginia replaced rolling conformity with a fixed date of December 31, 2025, and, except where Virginia specifically notes an exception, conforms to federal provisions that affect federal adjusted gross income for individuals or federal taxable income for corporations.
For an individual Virginia resident return, the practical starting point appears on Form 760. Line 1 instructs the taxpayer to enter federal adjusted gross income from the federal return and warns taxpayers to use federal adjusted gross income, not federal taxable income. Form 760 then applies Virginia additions, subtractions, deductions, exemptions, and credits through the Virginia return.
So the Virginia 1031 map looks like this:
| Step | What happens |
|---|---|
| Federal qualification | Federal law determines whether the exchange qualifies for nonrecognition under Section 1031. |
| Federal reporting | Form 8824 reports the exchange and computes realized gain, recognized gain, deferred gain, and replacement-property basis. |
| Virginia starting point | Virginia individual income tax starts with FAGI on Form 760. |
| Virginia review | Check Virginia additions, subtractions, credits, amended-return rules, and real estate recordation taxes. |
The important limitation: conformity does not mean Virginia ignores federal changes forever. Virginia Tax has ruled that when the IRS changed a taxpayer’s FAGI, Virginia adjusted the taxpayer’s Virginia return to match the federal adjusted gross income starting point.
Federal Form 8824 connection
Form 8824 is the bridge between the exchange and the federal return. The IRS instructions say to use Parts I, II, and III of Form 8824 to report each exchange of business or investment real property for like-kind real property. The instructions also say Form 8824 figures the amount of gain deferred as a result of a like-kind exchange.
Current federal instructions limit Section 1031 treatment to real property held for use in a trade or business or for investment, other than real property held primarily for sale. If you exchange business or investment real property solely for business or investment real property of like kind, federal law generally recognizes no gain or loss. If you also receive money or other non-like-kind property, federal law recognizes gain to the extent of that money or other property, while a loss is not recognized.
For delayed exchanges, the federal timing rule still controls the tax result. You must identify replacement property within 45 days after transferring the relinquished property. You must receive replacement property by the earlier of the 180th day after the transfer or the due date, including extensions, of the tax return for the year in which you transferred the relinquished property.
A qualified intermediary often fits the exchange structure because Treasury guidance treats qualified-intermediary arrangements as a safe harbor against actual or constructive receipt when the agreement limits the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the money or non-like-kind property. The safe-harbor point matters, but it should not be overstated: the Virginia state-income-tax question still begins with the federal tax result that Form 8824 and the rest of the federal return produce.
Resident vs. nonresident scenarios
Virginia resident selling Virginia property and buying Virginia property: start with federal Form 8824. If the exchange fully defers gain federally, the Virginia income-tax return generally starts from FAGI that reflects that federal deferral. Check separate Virginia real estate recordation taxes at each deed transfer.
Virginia resident selling Virginia property and buying out of state: Virginia’s conformity framework still starts with the federal result. If Form 8824 reports deferred gain and no current recognized gain, the state income-tax focus shifts to Virginia-specific adjustments and transfer taxes rather than a separate Virginia clawback form identified in the sources for this guide.
Virginia resident selling out-of-state property: Virginia Tax has addressed a resident who had gain taxed by another state in a different year. The ruling says Virginia’s out-of-state tax credit prevents double taxation only when the gain is taxed by Virginia and another state in the same taxable year. The same ruling denied a basis step-up for gain that another state taxed in a prior year. A resident with old out-of-state gain should have a preparer review the year-by-year sourcing and credit history.
Seller who is not a Virginia resident but transfers Virginia real estate: confirm the federal Form 8824 result, the Virginia filing position for any recognized gain, and any Virginia real estate transfer or recordation-tax issue. Virginia’s Form R-5E lists a like-kind exchange under IRC Section 1031 among the exempt transfers covered by its Nonresident Real Property Owner Exemption Certificate. Ask the closing or tax professional whether the form applies to the specific transfer and how it should be submitted. This certificate concerns nonresident-owner registration requirements; it does not replace the federal Form 8824 filing or decide every Virginia income-tax and recordation-tax issue.
State tax situations to verify
Recognized gain on the federal return. Form 8824 Part III separates realized gain, recognized gain, deferred gain, and basis. If cash, non-like-kind property, or net debt relief creates recognized gain federally, Virginia residents should expect the Virginia analysis to start with the FAGI impact, then move to Virginia-specific additions, subtractions, and credits.
Capital-gain treatment. Virginia Tax has stated that Virginia has no special tax rate for capital gains and no preferential treatment for qualified dividends. Do not assume a federally favorable capital-gain rate gives the same preferential rate on a Virginia return.
Federal changes after filing. Virginia Code § 58.1-311 requires an individual to report a federal taxable-income change or correction within one year of final determination by filing an amended Virginia return. Virginia Tax has also cited § 58.1-312 A 3 for assessment authority when the taxpayer fails to file the amended return.
Other-state credit timing. Virginia’s out-of-state tax credit, as described by Virginia Tax, provides relief when Virginia and another state tax the gain in the same taxable year. The ruling says Virginia law provides no relief when the other state taxed the income in prior years, and it denied a basis step-up for that previously taxed gain.
Recordation taxes. Virginia Tax has addressed intermediary and accommodator services for like-kind exchanges of real estate. The ruling explains that Virginia imposes state tax on recordation of documents relating to real estate transactions, and that a recordation tax applies to instruments admitted to record unless a statute exempts the instrument. In the exchange-first and exchange-last scenarios described in the ruling, Virginia Tax said the transactions were subject to Virginia recordation taxes when property transferred to the agent and again when conveyed to the purchaser.
Worked example
Hypothetical numbers for illustration only. This example ignores depreciation recapture, exchange expenses, credits, and local tax details.
A Virginia resident sells investment real estate for $500,000. The taxpayer’s adjusted basis is $300,000. The taxpayer completes a delayed exchange, receives $30,000 of cash, and receives like-kind replacement real property for the balance.
| Item | Amount |
|---|---|
| Sale value used for gain illustration | $500,000 |
| Adjusted basis | $300,000 |
| Realized gain | $200,000 |
| Cash or other non-like-kind property received | $30,000 |
| Federal recognized gain, before recapture character | $30,000 |
| Federal deferred gain | $170,000 |
The federal recognized-gain result comes from Form 8824’s logic: recognized gain is capped at the smaller of the exchange’s gain realized and the money or non-like-kind value received. The remaining $170,000 stays deferred federally. For Virginia, the first state-income-tax question is how that federal recognized gain affects FAGI on the Virginia return, because Virginia Form 760 starts with federal adjusted gross income.
If the taxpayer received no cash or other non-like-kind property and the federal exchange otherwise qualified for full nonrecognition, the Virginia income-tax analysis would usually start from a federal return with no current recognized exchange gain. The taxpayer would still keep Form 8824, closing statements, identification records, and Virginia deed-tax records with the permanent tax file.
Frequently asked questions
Yes, for individual income-tax purposes Virginia generally starts with federal adjusted gross income, and Virginia Tax describes Virginia as conforming to federal law through that starting point. If the federal return defers gain through Section 1031, the Virginia analysis generally begins with that federal result.
Yes. Form 8824 reports the federal like-kind exchange and figures realized gain, recognized gain, deferred gain, and basis. Virginia's FAGI starting point makes the federal reporting especially important for the state return.
Yes. Current exposure can arise if the federal return recognizes gain from money or other non-like-kind property, if a later IRS change increases FAGI, if another state's tax-credit timing matters for a Virginia resident, or if Virginia recordation taxes apply to real estate instruments.
The sources for this guide do not identify a Virginia annual 1031 tracking form like California Form 3840. That does not eliminate normal Virginia filing, amended-return, credit, or recordation-tax questions.
For a delayed exchange, identify replacement property within 45 days after transferring the relinquished property. Receive the replacement property by the earlier of 180 days after that transfer or the due date, including extensions, of the tax return for the transfer year.
Educational disclaimer
This article is for educational purposes only and is not legal, tax, or accounting advice. Virginia conformity, federal exchange reporting, recordation taxes, resident credits, and amended-return duties depend on the taxpayer’s facts. Work with a qualified tax professional before filing or structuring a Virginia 1031 exchange.
Primary-source references
- Code of Virginia § 58.1-301, Conformity to Internal Revenue Code
- Virginia Tax Bulletin 26-1
- Virginia 2025 Form 760 Resident Individual Income Tax Instructions
- Virginia Tax Public Document 10-31
- Virginia Tax Public Document 00-194
- Virginia Tax Public Document 04-97
- Virginia Form R-5E, Nonresident Real Property Owner Exemption Certificate
- IRS Instructions for Form 8824
- IRS Form 8824
- IRS Publication 544
- Treasury Decision 9935