1031 Exchange in Massachusetts
Massachusetts conforms to federal 1031 rules, so a properly structured exchange defers Massachusetts tax on the same timeline as federal tax. But Massachusetts has a clawback: under 830 CMR 62.5A.1(3)(d), when you exchange Massachusetts real property into out-of-state replacement property, the gain reflecting appreciation of the Massachusetts real estate is Massachusetts source income when you later dispose of the replacement property. Massachusetts taxes long-term capital gains at its 5% rate, plus a 4% surtax on taxable income above roughly $1.1 million.
Fast Facts
- State Income Tax on Capital Gains
- Massachusetts taxes long-term capital gains at the 5% personal income tax rate and short-term capital gains at 8.5%. A separate 4% surtax applies to total taxable income above the annual threshold ($1,083,150 for 2025; $1,107,750 for 2026).
- Conforms to Federal 1031
- Yes. Massachusetts follows the federal like-kind exchange rules and does not tax gain deferred under IRC Section 1031, so a valid federal deferral is generally recognized for Massachusetts tax on the same timeline.
- Clawback Rule
- Yes. Under 830 CMR 62.5A.1(3)(d), when you later dispose of property acquired by exchanging Massachusetts real estate for out-of-state property, the gain reflecting appreciation of the Massachusetts real estate is Massachusetts source income.
- Non-Resident Withholding
- Under 830 CMR 62B.2.4 (effective November 1, 2025), sales of Massachusetts real estate of $1,000,000 or more by non-residents are subject to withholding. Gain deferred in a 1031 exchange is generally exempt if the transferor files the required certification consenting to Massachusetts jurisdiction; withholding still applies to any recognized boot.
- Deed Excise (Transfer) Tax
- Massachusetts imposes a deed excise tax of $2.28 per $500 of consideration (about $4.56 per $1,000). There is no general 1031 exemption from the deed excise.
Why Massachusetts Is Different: The Clawback Rule
Most states that conform to Section 1031 let the deferral ride and tax the gain later, if and when it is recognized on a taxable state return. Massachusetts adds an extra layer for one specific fact pattern: an exchange of Massachusetts real property into out-of-state replacement property.
Massachusetts fully honors the deferral at the time of the exchange, so you do not pay Massachusetts tax when you close. What Massachusetts does not do is give up its claim to the gain that accrued while the property was in the Commonwealth. The state’s non-resident income tax regulation, 830 CMR 62.5A.1(3)(d), states plainly that “Massachusetts does not tax gain from the sale of real property that is deferred under the like-kind exchange provisions of Code section 1031,” but adds that “when the taxpayer subsequently disposes of the property acquired in such an exchange, the amount of the gain that reflects appreciation of Massachusetts real estate is Massachusetts source income.”
In practical terms: if you exchange a Boston apartment building for a replacement property in Florida, Massachusetts defers the gain now, but when you eventually sell the Florida property in a taxable transaction, the portion of the gain attributable to the appreciation of the original Massachusetts real estate remains Massachusetts source income — and Massachusetts can tax it, even years later and even if you have since become a non-resident. As with the federal deferral, this Massachusetts liability generally never comes due so long as you keep rolling the gain forward through successive like-kind exchanges. Unlike some states, Massachusetts does not currently impose a dedicated annual state form to track the deferred gain in the intervening years, but that does not erase the state’s underlying claim, so keeping thorough records of the original Massachusetts basis and gain is essential.
Legal and Tax Considerations
State Income Tax on Capital Gains
Long-term gains taxed at 5%; short-term gains at 8.5%. A 4% surtax applies to taxable income above the annual threshold ($1,083,150 for 2025; $1,107,750 for 2026).
Conforms to Federal 1031
Yes. Massachusetts does not tax gain deferred under IRC Section 1031, recognizing the federal deferral on the same timeline.
Clawback (830 CMR 62.5A.1)
Gain reflecting appreciation of Massachusetts real estate, deferred by exchanging into out-of-state property, is Massachusetts source income when the replacement property is later sold.
Non-Resident Withholding
830 CMR 62B.2.4 requires withholding on non-resident sales of $1M or more; deferred 1031 gain is exempt with the required transferor's certification, but boot recognized under Section 1031(b) is still subject to withholding.
Required Documentation
- Federal Form 8824 (Like-Kind Exchanges)
- Massachusetts Schedule D / income tax return reporting the exchange for the year it occurs
- Massachusetts DOR Transferor's Certification, if withholding under 830 CMR 62B.2.4 applies (sale price $1M or more by a non-resident)
- Qualified Intermediary exchange agreement and assignment documents
- Complete closing/settlement statements for both the relinquished and replacement properties
Clawback Rule
Yes — 830 CMR 62.5A.1(3)(d). When you later dispose of property acquired by exchanging Massachusetts real estate for out-of-state property, the gain reflecting appreciation of the Massachusetts real estate is Massachusetts source income.
Official References
- 830 CMR 62.5A.1 — Non-Resident Income Tax (like-kind exchange clawback at (3)(d))
- 830 CMR 62B.2.4 — Withholding on Sales of Massachusetts Real Estate
- Massachusetts Tax Rates (personal income and capital gains)
- Massachusetts 4% Surtax on Taxable Income
- RE27RC26 — 1031 Tax-Deferred Exchanges (Mass.gov)
Massachusetts Tax Rate and Transfer Tax Context
Massachusetts applies a flat 5% personal income tax rate under M.G.L. c. 62. Long-term capital gains — including gain on investment real estate held more than one year — are taxed at that same 5% rate. Short-term capital gains, by contrast, are taxed at a higher 8.5% rate. On top of the base tax, Massachusetts voters approved a 4% surtax on the portion of a taxpayer’s total taxable income that exceeds an annually adjusted threshold — $1,083,150 for tax year 2025 and $1,107,750 for tax year 2026. Because a large real estate gain from a failed or partial exchange can push total taxable income over that threshold, the surtax is a real consideration when modeling the tax cost of not completing a 1031 exchange.
On the transaction side, Massachusetts imposes a deed excise tax (commonly called tax stamps) of $2.28 per $500 of consideration, which works out to roughly $4.56 per $1,000 of the sale price, customarily paid by the seller and collected at the Registry of Deeds before the deed is recorded. Massachusetts does not provide a general deed-excise exemption for like-kind exchanges, so the excise generally applies to the conveyance of Massachusetts real property in an exchange just as it would in an ordinary sale. Standard county recording fees apply in addition to the excise.
Step-by-Step Process
- 1
Engage a Qualified Intermediary Before Closing
For a delayed exchange, you must set up a Qualified Intermediary (QI) before you close on the relinquished Massachusetts property. You cannot take actual or constructive receipt of the sale proceeds — the QI holds the funds. If the sale is $1,000,000 or more and you are a non-resident, plan for the 830 CMR 62B.2.4 withholding process and the transferor's certification that exempts properly deferred 1031 gain.
- 2
Sell the Relinquished Property
Close the sale of your relinquished property with the QI receiving the proceeds. Report the disposition on federal Form 8824, and report the exchange on your Massachusetts return for the year it occurs. The deed excise tax generally applies to the conveyance.
- 3
Identify Replacement Property Within 45 Days
You have 45 calendar days from the sale of the relinquished property to formally identify potential replacement property in writing, following the federal identification rules (such as the three-property rule or 200% rule).
- 4
Close on Replacement Property Within 180 Days
You must acquire the replacement property within 180 calendar days of the sale (or your tax-return due date including extensions, if earlier). Only real property held for investment or business use qualifies under post-2017 federal law.
- 5
File Federal and Massachusetts Reporting — and Track the Clawback
Report the exchange on federal Form 8824 and on your Massachusetts return. If your replacement property is outside Massachusetts, keep detailed records of the original Massachusetts basis and deferred gain, because under 830 CMR 62.5A.1(3)(d) the gain reflecting Massachusetts appreciation remains Massachusetts source income when you later dispose of the out-of-state property.
Timeline Calculator
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Frequently Asked Questions
Yes. Massachusetts follows the federal like-kind exchange rules and does not tax gain that is deferred under IRC Section 1031, so a properly structured exchange defers Massachusetts income tax on the same timeline as federal tax. The key wrinkle is the clawback: if you exchange Massachusetts real estate into out-of-state replacement property, the gain reflecting the Massachusetts appreciation stays Massachusetts source income and can be taxed when you later sell the replacement property (830 CMR 62.5A.1(3)(d)).
Under 830 CMR 62.5A.1(3)(d), Massachusetts does not tax gain deferred in a like-kind exchange, but 'when the taxpayer subsequently disposes of the property acquired in such an exchange, the amount of the gain that reflects appreciation of Massachusetts real estate is Massachusetts source income.' So if you exchange a Massachusetts property for one in another state, Massachusetts can tax the portion of the eventual gain attributable to the original Massachusetts appreciation when the replacement property is later sold in a taxable transaction — even if you have moved out of state.
Massachusetts taxes long-term capital gains at its flat 5% rate and short-term capital gains at 8.5%. On top of that, a 4% surtax applies to the portion of total taxable income above the annual threshold ($1,083,150 for 2025; $1,107,750 for 2026). Any recognized gain — including boot in a partial exchange or gain from a failed exchange — is taxed at the applicable rate and can also trigger the surtax if it pushes taxable income over the threshold.
Effective November 1, 2025, regulation 830 CMR 62B.2.4 requires withholding on sales of Massachusetts real estate of $1,000,000 or more by non-resident transferors. Gain that is deferred in a valid Section 1031 exchange is generally exempt from withholding if the transferor provides the required certification acknowledging the deferred gain and consenting to Massachusetts jurisdiction. However, any gain recognized as boot under Section 1031(b) is still subject to withholding.
Yes. Massachusetts imposes a deed excise tax of $2.28 per $500 of consideration (roughly $4.56 per $1,000), collected at the Registry of Deeds before recording and customarily paid by the seller. Massachusetts does not provide a general deed-excise exemption for like-kind exchanges, so the excise generally applies to the conveyance of Massachusetts real property in a 1031 exchange.
Related Guides
- What Is a 1031 Exchange? — the complete federal framework, deadlines, and rules
- 1031 Exchange by State — compare Massachusetts with other states’ rules and clawback provisions
- Boston-Cambridge-Newton, MA
References
Official References
- 830 CMR 62.5A.1 — Non-Resident Income Tax (like-kind exchange clawback at (3)(d))
- 830 CMR 62B.2.4 — Withholding on Sales of Massachusetts Real Estate
- Massachusetts Tax Rates (personal income and capital gains)
- Massachusetts 4% Surtax on Taxable Income
- RE27RC26 — 1031 Tax-Deferred Exchanges (Mass.gov)
- IRS Form 8824 — Like-Kind Exchanges
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.