1031 Exchange in Virginia
Virginia conforms to the Internal Revenue Code, so a properly structured 1031 exchange defers Virginia income tax (rates of 2% to 5.75%) along with federal tax. The state does not withhold tax on a nonresident seller's real estate proceeds, though closing agents must register nonresident sellers with Virginia Tax using Form R-5 or R-5E. Unlike most states, Virginia does regulate exchange facilitators: the Virginia Exchange Facilitators Act (Va. Code § 55.1-800 et seq.) requires qualified intermediaries operating in the Commonwealth to safeguard exchange funds and carry at least $250,000 in errors and omissions insurance or equivalent financial security. Virginia has no clawback rule for gain deferred on Virginia property that is later exchanged out of state.
Fast Facts
- State Income Tax Rate
- 2% to 5.75% (progressive). Virginia's graduated rates start at 2% and reach the top rate of 5.75% on taxable income over $17,000 (Virginia Department of Taxation).
- Conforms to Federal 1031
- Yes. Virginia conforms to the Internal Revenue Code (fixed conformity date of December 31, 2025, per Virginia Tax Bulletin 26-1), so gain deferred under IRC Section 1031 is also deferred for Virginia income tax purposes.
- Non-Resident Withholding
- No withholding on sale proceeds. However, real estate reporting persons must register nonresident sellers with Virginia Tax (Form R-5, or Form R-5E for exempt sales) by the 15th day of the month after closing.
- State Clawback Rule
- None. Virginia does not have a clawback provision requiring you to report deferred Virginia-source gain when the replacement property in another state is later sold.
- Qualified Intermediary Requirements
- Regulated by the Virginia Exchange Facilitators Act (Va. Code § 55.1-800 et seq.). Facilitators must hold exchange funds in protected accounts and maintain at least $250,000 of errors and omissions insurance, or equivalent cash or letters of credit. There is no state licensing or registration regime.
Legislative Updates
Fixed-Date IRC Conformity (Tax Bulletin 26-1)
During the 2026 General Assembly session, Virginia replaced its rolling conformity to the Internal Revenue Code with a fixed conformity date of December 31, 2025. IRC Section 1031 remains fully incorporated, so 1031 deferral continues to apply for Virginia income tax purposes.
Exchange Facilitators Act Recodified (Va. Code Title 55.1, Chapter 8)
Virginia's Exchange Facilitators Act, first enacted in 2010, was recodified at Va. Code § 55.1-800 et seq. It requires exchange facilitators to hold client funds in qualified escrow, trust, or dual-authorization accounts, prohibits commingling, and requires at least $250,000 of errors and omissions insurance or equivalent financial security.
Legal and Tax Considerations
State Income Tax Rate
2% to 5.75% (progressive), with the top 5.75% rate applying to Virginia taxable income over $17,000.
Conforms to Federal 1031
Yes. Virginia conforms to the IRC as of December 31, 2025 (Tax Bulletin 26-1), so federal 1031 deferral flows through to the Virginia return.
Non-Resident Withholding
Virginia does not withhold state tax from a nonresident seller's real estate proceeds. Closing agents (real estate reporting persons under IRC § 6045(e)) must instead register nonresident sellers with Virginia Tax using Form R-5, or Form R-5E if the sale is exempt from income tax — which includes a fully deferred 1031 exchange.
Exchange Facilitator Regulation
The Virginia Exchange Facilitators Act (Va. Code § 55.1-800 et seq.) requires QIs to keep exchange funds in a qualified escrow or trust account or a separately identified account with dual authorization for withdrawals (§ 55.1-802), maintain $250,000 of errors and omissions insurance or equivalent cash/letters of credit (§ 55.1-803), and refrain from commingling exchange funds with operating funds (§ 55.1-804).
Property Tax
Property taxes in Virginia are assessed and collected at the local level, and rates vary by city and county. Verify the rate with the local commissioner of the revenue or assessor's office when underwriting a replacement property.
Required Documentation
- Federal Form 8824
- Virginia Form 760 (residents) or Form 763 (nonresidents)
- Form R-5 / R-5E nonresident seller registration (filed by the real estate reporting person at closing)
Clawback Rule
None
Step-by-Step Process
- 1
Engage a Qualified Intermediary Before Closing
Exchange funds must be held by a qualified intermediary — you cannot take receipt of proceeds. In Virginia, confirm your QI complies with the Exchange Facilitators Act: exchange funds in a qualified escrow/trust or dual-authorization account, no commingling, and at least $250,000 of errors and omissions insurance or equivalent security (Va. Code §§ 55.1-802 through 55.1-804).
- 2
Complete Nonresident Seller Registration if Applicable
If the seller is not a Virginia resident, the real estate reporting person (typically the closing attorney or settlement agent) must file Form R-5 with Virginia Tax by the 15th day of the month after closing — or Form R-5E if the sale is exempt from income tax, as in a fully deferred 1031 exchange.
- 3
Identify Replacement Property Within 45 Days
You must identify potential replacement properties in writing within 45 days of selling your relinquished property, following the federal identification rules (three-property, 200%, or 95% rule).
- 4
Close on Replacement Property Within 180 Days
Complete the purchase of your replacement property within 180 days of the sale of your relinquished property (or by your tax return due date, including extensions, if earlier). Build in time for local due diligence such as zoning, historic district, and environmental review.
- 5
File Federal and Virginia Tax Returns
Report the exchange on federal Form 8824. Because Virginia conforms to the IRC, the deferred gain also stays deferred on your Virginia return — Form 760 for residents or Form 763 for nonresidents.
- 6
Review Local Regulations and Property Taxes
Property taxes and zoning rules are set at the local level and vary between Virginia cities and counties. Historic districts in cities such as Richmond, Alexandria, and Fredericksburg carry preservation requirements, and properties in Chesapeake Bay Preservation Act areas face additional environmental restrictions.
Timeline Calculator
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Common Pitfalls
Assuming Virginia does not regulate qualified intermediaries
Issue
Virginia is one of the minority of states with an exchange facilitator statute. A QI operating in the Commonwealth must safeguard exchange funds and carry $250,000 of errors and omissions insurance or equivalent security under the Exchange Facilitators Act (Va. Code § 55.1-800 et seq.).
Prevention
Before wiring funds, ask the QI how exchange funds are held (qualified escrow/trust or dual-authorization account) and request proof of the required insurance or security.
Skipping the nonresident seller registration
Issue
Although Virginia has no withholding on nonresident sale proceeds, the closing agent must register nonresident sellers with Virginia Tax on Form R-5 (or R-5E for exempt sales) shortly after closing.
Prevention
Confirm with your settlement agent that the R-5 or R-5E filing is handled, and keep a copy with your exchange records.
Overlooking property tax variations between localities
Issue
Property tax rates are set locally and vary significantly across Virginia's cities and counties, which changes the cash-flow math on otherwise similar replacement properties.
Prevention
Check the actual local tax rate and assessment practice with the locality's commissioner of the revenue or assessor before identifying a replacement property, and factor it into your projections.
Neglecting historic district regulations
Issue
Several Virginia cities, including Richmond, Alexandria, and Fredericksburg, have historic districts with review requirements that can restrict modifications and add cost and time to renovations.
Prevention
Research historic district rules before purchasing, work with professionals experienced in historic properties, and budget for longer approval timelines.
Misunderstanding Chesapeake Bay preservation requirements
Issue
Properties in Chesapeake Bay Preservation Act areas are subject to environmental regulations that can limit land disturbance, buffers, and future development.
Prevention
Include environmental due diligence for properties near tidal waters or in designated preservation areas, and consult professionals familiar with Virginia's environmental rules before closing.
Qualified Intermediaries
The following companies provide qualified intermediary services in Virginia. This is not an endorsement — verify each firm’s compliance with the Virginia Exchange Facilitators Act before engaging them.
Towne 1031 Exchange, LLC
- Service Areas: Virginia, Nationwide
- Website: Towne 1031 Exchange, LLC
IPX1031
- Service Areas: Virginia, Nationwide
- Website: IPX1031 Virginia
Realty Exchange Corporation
- Headquarters: Gainesville, Virginia
- Service Areas: Virginia, Maryland, Washington, D.C.
- Website: Realty Exchange Corporation
Frequently Asked Questions
Does Virginia have any special requirements for 1031 exchanges?
Virginia conforms to federal 1031 exchange rules, so a qualifying federal exchange also defers Virginia income tax (rates of 2% to 5.75%). Two state-specific points do apply: qualified intermediaries operating in Virginia are regulated by the Exchange Facilitators Act (Va. Code § 55.1-800 et seq.), which imposes fund-safeguarding and $250,000 insurance-or-security requirements, and nonresident sellers must be registered with Virginia Tax by the closing agent on Form R-5 or R-5E.
Can I exchange a property in another state for a property in Virginia?
Yes. Section 1031 is a federal provision that allows exchanges across state lines, and Virginia recognizes the deferral. If you exchange out of a state with a clawback rule (such as California), that state may still track and eventually tax the gain that accrued there — Virginia itself has no clawback rule.
Does Virginia withhold tax when a nonresident sells real estate?
No. Unlike states such as Maryland or West Virginia, Virginia does not require withholding from a nonresident seller’s proceeds. Instead, the real estate reporting person (usually the settlement agent) must register the nonresident seller with Virginia Tax using Form R-5, or Form R-5E when the sale is exempt from income tax — which includes a fully deferred 1031 exchange.
What are the property tax implications of owning investment property in Virginia?
Property taxes in Virginia are assessed and collected at the local level, and rates and reassessment cycles vary by city and county. Confirm the current rate and assessment practice with the locality’s commissioner of the revenue or assessor’s office, and build the local tax burden into your cash-flow analysis before identifying a replacement property.
Major Cities
Virginia Beach, Norfolk, Chesapeake, Arlington, Richmond, Newport News, Alexandria, Hampton, Roanoke, Portsmouth
References
Official References
- Virginia Department of Taxation
- Virginia Tax — Registration of Nonresident Property Owners (Forms R-5 / R-5E)
- Virginia Exchange Facilitators Act, Va. Code Title 55.1, Chapter 8
- Virginia Tax Bulletin 26-1 — IRC Conformity
- Virginia Real Estate Board (DPOR)
- 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.