Glossary
1031 exchange
A 1031 exchange allows a taxpayer to exchange real property and defer the gain or loss on the sale of the old/relinquished property until the new/replacement property is later sold.
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What is a 1031 exchange?
A 1031 exchange, named after Section 1031 of the U.S. Internal Revenue Code, is a transaction in which eligible property is exchanged for property of “like-kind” and gain or loss is deferred for federal income tax purposes. Normally, when a taxpayer sells property, gain or loss on the sale is recognized in the tax year in which the sale occurs. But in a like-kind exchange, gain or loss on the sale of relinquished property is deferred until the replacement property is sold.
The key concept is that the transaction is treated as an exchange rather than a sale, enabling the taxpayer to defer capital gains taxes that would normally be triggered by the sale of an asset. A transaction qualifies as a 1031 exchange if it’s an exchange of eligible like-kind properties. Since the Tax Cuts and Jobs Act (TCJA), only real property qualifies for a 1031 exchange.
What type of real property qualifies for a 1031 exchange?
Real property qualifies for a 1031 exchange only when it is considered real property under the laws of the state or local jurisdiction where the property is located at the time of the exchange. To qualify as a 1031 exchange, the exchanged properties must be held by the taxpayer for an eligible purpose.
Examples of eligible purposes include:
- The 1031 exchange property must be held either for productive use in a trade or business or for investment.
- Land — and improvements to land — is property that qualifies for a 1031 exchange. The term “improvements to land” means inherently permanent structures like buildings and the structural components of inherently permanent structures such as walls, floors, and ceilings.
- Water and the air space over it — “superjacent” — are eligible for a 1031 exchange. An example would be boat slips at a marina.
- Unsevered natural products of land can also qualify for a 1031 exchange. Unsevered natural products of land include things like growing crops and timber, mines, wells, and other natural deposits. Natural products like crops, timber, water, ores, and minerals will no longer qualify for a 1031 exchange once they’re severed or removed from the land.
The 1031 exchange regulations provide additional definitions and examples of qualifying real property.
What types of property do not qualify for a 1031 exchange?
Examples of properties that do not qualify for a 1031 exchange include:
- A property sold for cash, including transactions where the sale proceeds are reinvested in like-kind property. In order to qualify as a 1031 exchange, the sale and purchase must be steps in an integrated plan, not independent transactions.
- Property such as inventory, which is held primarily for sale.
- Property that serves as a taxpayer’s primary residence and other property held for personal use.
- Stock, bonds, notes, other securities, or evidence of indebtedness or interest.
- Interests in a partnership, with the exception of a publicly traded partnership.
- Certificates of trust, certificates of beneficial interests, and choses in action.
Do intangible interests qualify for a 1031 exchange?
Yes, intangible interests qualify for a 1031 exchange if they are considered real property under Section 1031. Intangible interests that may qualify for a 1031 exchange include:
- Fee ownership
- Co-ownership
- Leasehold
- Option to acquire real property
- Easement
- Stock in a cooperative housing corporation
- Shares in a mutual ditch, reservoir, or irrigation company
When is property “like-kind”?
Property is like-kind when it shares the same nature and character as another property. Real property is like-kind to other real property, regardless of whether it is improved or unimproved. The IRS does not consider the grade or quality of the property when determining whether it is like-kind.
Note: real property located in the United States is not like-kind to real property located outside of the United States. The IRS published these useful real estate tips about like-kind exchanges.
What if a 1031 exchange includes like-kind property and boot?
If a 1031 exchange includes both like-kind property and “boot,” gain may still be partially deferred. Boot is any money or non-like-kind property received in the 1031 exchange. If a 1031 exchange includes boot, the taxpayer recognizes gain to the extent of the fair market value of the boot. Loss is still deferred even if the 1031 exchange involves boot.
What is a deferred exchange?
A deferred exchange is a 1031 exchange in which a taxpayer transfers property but does not receive the replacement property right away. A deferred exchange can still qualify as a 1031 exchange under several safe harbors available in the Internal Revenue Code.
For a deferred exchange, the replacement property must be identified within 45 days after selling the relinquished property. The deferred exchange needs to be fully completed within 180 days after selling the relinquished property. For example, if the relinquished property is sold on November 16, the 45-day identification period would end on December 31, and the 180-day exchange period would end on March 15 of the following year.
What is a reverse 1031 exchange?
A reverse 1031 exchange is when the taxpayer gets the replacement property before selling the relinquished property. Under the reverse 1031 exchange safe harbor, the taxpayer “parks” the replacement property with a third party — the accommodation party — until the relinquished property is sold.
How is a 1031 exchange reported?
A 1031 exchange is reported on Form 8824, Like-Kind Exchanges. The form is filed for the tax year in which the taxpayer transferred property to another party as part of the exchange. State reporting requirements may also apply.
Do all states allow 1031 exchanges?
Yes, all states allow 1031 exchanges, and most states follow the federal income tax treatment of like-kind exchanges for state income tax purposes. Several states, including California, Oregon, Montana, and Massachusetts, provide special “claw-back provision” rules. Those states require that any gain in property value accrued in that state is subject to that state’s taxes — regardless of whether or not that property was exchanged in another state.
California, specifically, has a unique set of reporting rules on like-kind exchanges. Many states also levy real property transfer taxes on these transactions.
Which states have adopted 1031 exchanges?
The charts below, separated by corporate income and personal income, show whether the state has adopted IRC §1031 as amended by the Tax Cut and Jobs Act, limiting tax-free exchanges to exchanges of real property that is not held primarily for sale for exchanges completed after December 31, 2017, or has enacted its own provision on the issue. Thus, under amended IRC §1031, like-kind exchanges of tangible and intangible personal property can't qualify as tax-free, like-kind exchanges.
State tax treatment of like-kind exchanges: Corporate income
State |
Does the state follow IRC §1031? |
AK |
Yes. Alaska is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
AL |
Yes. Alabama is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
AR |
No. Arkansas is a selective conformity state and does not adopt IRC §1031 relating to nonrecognition of gain or loss from like-kind exchanges as amended by the TCJA. However, it provides that no gain or loss is recognized in an exchange of property for like-kind property of a similar value. |
AZ |
Yes. Arizona conforms to IRC §1031 relating to nonrecognition of gain or loss from like-kind exchanges. |
CA |
Yes. Per 2019 legislation, California adopts the changes made by the TCJA to IRC §1031, except that California's adoption generally applies to exchanges completed after January 10, 2019. |
CO |
Yes. Colorado is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
CT |
Yes. Connecticut conforms to the IRC as in effect on the last day of the relevant tax year and has not decoupled from the changes made by the TCJA to IRC §1031. |
DC |
Yes. The District of Columbia is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
DE |
Yes. Delaware is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
FL |
Yes. Florida conforms to the changes made by the TCJA to IRC §1031. |
GA |
Yes. Georgia conforms to the IRC as in effect on January 1, 2023, and has not decoupled from the changes made by the TCJA to IRC §1031. |
HI |
Yes. Hawaii conforms to the IRC as in effect on a specified date and has not decoupled from the changes made by the TCJA to IRC §1031. |
IA |
Yes. The exchange of personal property completed in tax years beginning during the 2018 calendar year and otherwise qualifies as a tax-deferred, like-kind exchange under IRC §1031 is treated as a like-kind exchange for Iowa purposes for all taxpayers. |
ID |
Yes. Idaho conforms to the IRC as in effect on January 1, 2020, and has not decoupled from the changes made by the TCJA to IRC §1031. |
IL |
Yes. Illinois is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
IN |
Yes. Indiana conforms to the IRC as in effect on February 11, 2018, and has not decoupled from the changes made by the TCJA to IRC §1031. |
KS |
Yes. Kansas is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
KY |
Yes. Kentucky conforms to the changes made by the TCJA to IRC §1031. |
LA |
Yes. Louisiana is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
MA |
Yes. Massachusetts is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
MD |
Yes. Maryland is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
ME |
Yes. Maine conforms to the IRC as in effect on March 23, 2018, and has not decoupled from the changes made by the TCJA to IRC §1031. |
MI |
Yes. The treatment applies to both the corporate income tax and the Michigan Business Tax for those taxpayers with certificated credits who elect to file and pay under the Michigan Business Tax. |
MN |
Yes. Prior to May 31, 2019, taxpayers could use IRC §1031 like-kind exchanges to defer gain or loss on business personal property for exchanges occurring in 2018, even though the IRC limited 1031 exchanges to real estate not held primarily for sale. |
MO |
Yes. Missouri is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
MS |
Yes. Mississippi follows federal rules, regulations, and revenue procedures that are not contrary to the context and intent of Mississippi law. Mississippi will follow the changes made by the Tax Cuts and Jobs Act to IRC §1031 exchanges for exchanges of Mississippi real property for real property located outside Mississippi. However, Mississippi has a nonrecognition provision analogous to IRC §1031, providing an exclusion of gain for Mississippi property, and this is not limited to real property not held primarily for sale. |
MT |
Yes. Montana is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
NC |
Yes. North Carolina conforms to IRC §1031 in effect on January 1, 2019, and has not decoupled from the changes made by the TCJA to IRC §1031. |
ND |
Yes. North Dakota is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
NE |
Yes. |
NH |
No. However, for all tax years beginning on or after January 1, 2020, New Hampshire adopts the IRC in effect on December 31, 2018. |
NJ |
Yes. New Jersey adopts the current IRC and has not decoupled from the changes made by the TCJA to IRC §1031. |
NM |
Yes. New Mexico is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
NV |
N/A |
NY |
Yes. |
OH |
N/A |
OK |
Yes. Oklahoma is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
OR |
Yes. Oregon conforms to the IRC either in effect on December 31, 2017, or in effect for the tax year at issue, and has not decoupled from the changes made by the TCJA to IRC §1031. |
PA |
Yes. By adopting federal taxable income before net operating loss and special deductions as the starting point for computing taxable income, Pennsylvania automatically adopts the federal treatment of gains and losses and has not decoupled from the changes made by the TCJA to IRC §1031. |
RI |
Yes. Rhode Island is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
SC |
Yes. South Carolina adopts the IRC as in effect through a specified date and has not decoupled from the changes made by the TCJA to IRC §1031. |
SD |
N/A |
TN |
Yes. Tennessee is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
TX |
No. Texas adopts the IRC as in effect on January 1, 2007, which precedes the changes made by the TCJA to IRC §1031. |
UT |
Yes. Utah is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
VA |
Yes. Virginia conforms to the TCJA changes to IRC §1031(a)(1) for taxable year 2018 or thereafter. Virginia conforms to provisions of the federal Tax Cuts and Jobs Act of 2017 that affect the computation of federal taxable income of corporations for tax years beginning on or after January 1, 2018. |
VT |
Yes. Vermont adopts the IRC as in effect through a specified date and has not decoupled from the changes made by the TCJA to IRC §1031. However, Vermont imposes a land-gains tax on gains from a sale or exchange of land in Vermont held fewer than six years. |
WA |
N/A |
WI |
Yes. Wisconsin adopts the IRC as in effect on December 31, 2017, and has not decoupled from the changes made by the TCJA to IRC §1031. |
WV |
Yes. West Virginia adopts the IRC as in effect on December 31, 2019, and has not decoupled from the changes made by the TCJA to IRC §1031. |
WY |
N/A |
State tax treatment of like-kind exchanges: Personal income
State |
Does the state follow IRC §1031? |
AK |
N/A |
AL |
Yes. Also, the basis of property acquired in a like-kind exchange is determined in accordance with IRC §1031(d). |
AR |
No. Arkansas does not adopt IRC §1031 but has its own provision, which provides that no gain or loss is recognized in an exchange of property for like-kind property of a similar value. |
AZ |
Yes. Because Arizona uses federal adjusted gross income under the Internal Revenue Code (IRC) as of a specific date — see ¶55,505 — it conforms to the TCJA changes. |
CA |
Yes, but with modifications. Per 2019 legislation, California adopts the changes made by the TCJA to IRC §1031 except that (1) California adopts them only for taxpayers whose adjusted gross income for the taxable year in which the exchange begins is equal to or more than a certain amount — $500,000 for a head of household, a surviving spouse, or spouses filing a joint return and $250,000 for a taxpayer filing an individual return — and (2) California's adoption generally applies to exchanges completed after January 10, 2019, whereas the federal changes generally apply to exchanges occurring after December 31, 2017. |
CO |
Yes. Colorado is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
CT |
Yes. Connecticut conforms to the IRC as in effect on the last day of the relevant tax year and has not decoupled from the changes made by the TCJA to IRC §1031. |
DC |
Yes. The District of Columbia is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
DE |
Yes. Delaware is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
FL |
N/A |
GA |
Yes. Georgia conforms to the IRC as amended and in effect on February 9, 2018, and has not decoupled from the changes made by the TCJA to IRC §1031. |
HI |
Yes. Hawaii conforms to the IRC as in effect as of a specified date and has not decoupled from the changes made by the TCJA to IRC §1031. |
IA |
Yes. The exchange of personal property completed in tax years beginning during the 2019 calendar year and that otherwise qualifies as a tax-deferred, like-kind exchange under IRC §1031 may, at the election of the taxpayer, be treated as a tax-deferred, like-kind exchange of personal property for Iowa tax purposes. The exchange of personal property completed in tax years beginning during the 2018 calendar year and otherwise qualifies as a tax-deferred like-kind exchange under IRC §1031 is treated as a like-kind exchange for Iowa purposes for all taxpayers. |
ID |
Yes. Idaho follows the Internal Revenue Code — as amended, as of a specific date — and has not decoupled from the changes made by the TCJA to IRC §1031. |
IL |
Yes. Illinois is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
IN |
Yes. Indiana conforms to the IRC as in effect on January 1, 2019, and has not decoupled from the changes made by the TCJA to IRC §1031. |
KS |
Yes. Kansas is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
KY |
Yes. Kentucky has not decoupled from the changes made by the TCJA to IRC §1031. |
LA |
Yes. Louisiana is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
MA |
Yes. Massachusetts conforms to IRC §1031 as amended on January 1, 2022, so Massachusetts has adopted the changes made by the TCJA to IRC §1031. |
MD |
Yes. Maryland is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
ME |
Yes. Maine conforms to the IRC, as in a specific date, and has not decoupled from the changes made by the TCJA to IRC §1031. |
MI |
Yes. Michigan conforms to the IRC as in effect on January 1, 2018, or, at the option of the taxpayer, to the IRC in effect for the tax year, and has not decoupled from the changes made by the TCJA to IRC §1031. |
MN |
Yes. Minnesota adopts the IRC as in effect on December 15, 2022, so it adopts the changes made by the TCJA to IRC §1031. Prior to May 31, 2019, Minnesota did not adopt the provisions of the TCJA, and taxpayers were required to make an adjustment for Minnesota income tax purposes. |
MO |
Yes. Missouri is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
MS |
Yes. Mississippi has a nonrecognition provision analogous to IRC §1031, providing that no gain or loss is recognized if property held for productive use in trade or business or for investment is exchanged solely for property of a like-kind to be held either for productive use in trade or business or for investment. |
MT |
Yes. Montana is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
NC |
Yes. North Carolina conforms to IRC §1031 as in effect on January 1, 2019, and has not decoupled from the changes made by the TCJA to IRC §1031. |
ND |
Yes. North Dakota is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
NE |
Yes. Nebraska is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
NH |
No. For tax years beginning in 2017, the conformity date was December 31, 2015. Before 2017, New Hampshire conformed to IRC §1031 as in effect on December 31, 2000, thus excluding conformity with IRC §1031 for Business Profit Tax purposes. |
NJ |
Yes. New Jersey law provides that "net gains or income" does not include gains or income from transactions to the extent that nonrecognition is allowed for federal income tax purposes. So, New Jersey conforms to nonrecognition treatment for like-kind exchanges as provided in IRC §1031. |
NM |
Yes. New Mexico is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
NV |
N/A |
NY |
Yes. New York has not decoupled or made modifications to the changes made by the TCJA to IRC §1031. |
OH |
Yes. Ohio conforms to the IRC as in effect on March 30, 2017, and has not decoupled from the changes made by the TCJA to IRC §1031. |
OK |
Yes. Oklahoma is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
OR |
Yes. Oregon conforms to the IRC as of a specified date or, if related to the definition of taxable income, as applicable to the tax year of the taxpayer, and has not decoupled from the changes made by the TCJA to IRC §1031. |
PA |
No. Prior to tax year 2023, Pennsylvania does not use federal income as the starting point for the calculation of state taxable income for personal income tax and has no provision analogous to IRC §1031. Applicable to exchanges of property that occur in tax years beginning after December 31, 2022, the requirements of IRC §1031 are incorporated into the Pennsylvania personal income tax law. |
RI |
Yes. Rhode Island is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
SC |
Yes. South Carolina adopts the IRC as in effect through December 31, 2018, and has not decoupled from the changes made by the TCJA to IRC §1031. |
SD |
N/A |
TN |
N/A
|
TX |
N/A |
UT |
Yes. Utah is a rolling conformity state and has not decoupled from the changes made by the TCJA to IRC §1031. |
VA |
Yes. |
VT |
Yes. However, Vermont imposes a land-gains tax on gains from a sale or exchange of land in Vermont held fewer than six years. |
WA |
N/A |
WI |
Yes. Wisconsin adopts the IRC as in effect on December 31, 2017, and has not decoupled from the changes made by the TCJA to IRC §1031. |
WV |
Yes. West Virginia adopts the IRC as in effect on December 31, 2019, and has not decoupled from the changes made by the TCJA to IRC §1031. |
WY |
N/A |
This information was last updated on 03/21/2024.
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