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

Alabama

Alaska

Arizona

California

California Franchise Tax Board

Requirements - 3.3% & Form 593C Pub 1016

Colorado

Colorado Department of Revenue

Requirements - 2% & Form 1083

Connecticut

Delaware

Florida

Georgia

Georgia Department of Revenue

Requirements - 3% & Form IT-AFF

Hawaii

Hawaii Department of Taxation

Requirements - 5% & Form N 289

Idaho

Idaho State Tax Commission

Requirements - N/A

Illinois

Indiana

Indiana Department of Revenue

Requirements - 1031 is not recognized unless true swap with simultaneous exchange. Full Indiana state tax withheld

Kansas

Louisiana

Maine

Maine Revenue Services

Requirements - 2.5% & REW-5

Maryland

Maryland Revenue Services

Requirements - 4.75% & Form MW506AE

Massachusetts

Massachusetts

Requirements - N/A

Michigan

Minnesota

Mississippi

Mississippi Tax Commission

Requirements - Over $100,000 required 5% withholding or net amount realized by seller, whichever is less.

Missouri

Montana

Nebraska

Nebraska

Requirements - N/A

Nevada

New Hampshire

New Jersey

New Jersey Division of Taxation

Requirements - 8.97% of tax gain on house sold but collection shall not be less than 2% of the consideration & Form GIT/REP-1,4.

New Mexico

New York

New York Department of Taxation & Finance

Requirements - Estimated Tax amount by owner & form IT-2663.

North Carolina

North Carolina Department of Revenue

Requirements - Completion of Form NC-1099NRS but no tax if performing a 1031 tax deferred exchange.

North Dakota

Ohio

Ohio Department of Taxation

Requirements - N/A

Oklahoma

Oklahoma Tax Commission

Requirements - N/A

Oregon

Oregon Department of Revenue

Requirements - 4% to 10% effective Jan. 1, 2008

Pennsylvania

Pennsylvania

Requirements - N/A

Rhode Island

Rhode Island Division of Taxation

Requirements - 6% of sales price or total gain for individuals, estates, partnerships or trusts and 9% for nonresident corportations unless the nonresident seller makes gain election and files RI form 71.3.

South Carolina

South Carolina Department of Revenue

Requirements - 5% for corporations, 7% for individuals. Exemption through Form I-295.

South Dakota

South Dakota

Requirements - N/A

Tennessee

Tennessee

Requirements - N/A

Utah

Utah State Tax Commission

Requirements - N/A

Vermont

Vermont Department of Taxes

Requirements - 2.5% Form RW-171

Virginia

Washington

Washington Department of Revenue

Requirements - 1.7% excise tax upon sale.

Washington D.C.

West Virginia

Wisconsin

Wyoming