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State Taxation on 1031 Exchanges

State Mandatory Withholding

Most states impose a state income tax when real estate is sold. To ensure that the state collects this income tax from a non-resident seller, some states collect the tax at closing. This type of collection is called a state mandatory withholding.

Each state varies on how it collects the tax withholding. The state may place the burden of collecting the tax withholding upon the buyer. Other states may place the burden on the authorized agent that provides closing and settlement services. The authorized agent may be an attorney, the title officer or an escrow agent (again, the state determines who provides the closing and settlement services.)

The amount of money that the state collects is usually an amount equal to the state income tax. It varies from state to state. It may be a straight percentage of the sales price or it may be a percentage of the net proceeds. The authorized agent who collects the tax withholding may serve as an excellent resource for providing the percentage amount that the state is collecting at closing.

Exemptions

The state may allow an exemption to the mandatory withholding. Usually, the exemption includes property transferred in a 1031 Exchange. To claim the exemption, the non-resident will need to sign an exemption form (or certificate) provided by the state. A state may require the seller to submit the exemption 20 days before closing while other states may allow the exemption form to be submitted at closing. Again, each state has its own specific requirements for claiming the exemption so it is best to consult with the closing/settlement agent or the state website for revenue collection.

Individual States

The following information is intended to provide a starting point to determine the website for the state collection department, the withholding amount, and the exemption form. For the most current information, please refer to the particular state’s Tax Board website and (as a suggestion) search for "nonresident withholding tax exemption."

Select Your State

"WASHINGTON STATE LAW, RCW 19.310.040, REQUIRES AN EXCHANGE FACILITATOR TO EITHER MAINTAIN A FIDELITY BOND IN AN AMOUNT OF NOT LESS THAN ONE MILLION DOLLARS THAT PROTECTS CLIENTS AGAINST LOSSES CAUSED BY CRIMINAL ACTS OF THE EXCHANGE FACILITATOR, OR HOLD ALL CLIENT FUNDS IN A QUALIFIED ESCROW ACCOUNT OR QUALIFIED TRUST." RCW 19.310.040(1)(b) (as amended)