Real estate investors are not always looking to purchase their next property in the same state. Some may want to relocate their investments, enter a stronger rental market, diversify their real estate portfolio or purchase property closer to where they plan to retire.
This raises an important question:
Can you sell an investment property in one state and purchase a replacement property in another state through a 1031 exchange?
In many cases, the answer is yes.
A properly structured 1031 exchange may allow an investor to sell qualifying investment or business real estate in one state and acquire qualifying replacement property in another state while deferring the recognition of certain capital gains taxes.
However, crossing state lines can introduce additional tax, reporting and closing considerations. Understanding those requirements before selling is critical.
What Is a 1031 Exchange?
A 1031 exchange, also known as a like-kind exchange, is a tax-deferral strategy available to qualifying real estate investors.
Under Section 1031 of the Internal Revenue Code, an investor may be able to defer recognizing gain when qualifying real property held for investment or productive use in a trade or business is exchanged for other qualifying real property that will also be held for investment or business use.
A 1031 exchange does not necessarily eliminate the tax. Instead, it generally postpones recognition of the gain by carrying the investor’s adjusted basis into the replacement property.
The exchange must be carefully structured, and the investor should involve a qualified intermediary before the relinquished property closes.
Can Replacement Property Be in Another State?
Generally, an investor may sell qualifying real estate in one state and purchase qualifying replacement real estate in another state.
For example, an investor may potentially:
- Sell a rental property in New Jersey and purchase a rental property in Florida.
- Sell commercial property in New York and acquire an apartment building in Pennsylvania.
- Sell vacant investment land in Pennsylvania and purchase a rental property in New Jersey.
- Sell a multifamily property and acquire qualifying commercial or residential investment real estate elsewhere in the United States.
The properties do not have to be located in the same state, county or municipality.
They also do not have to be identical property types. The federal definition of “like-kind” is relatively broad when applied to real property. An apartment building may potentially be exchanged for retail space, vacant investment land or another qualifying form of real estate.
What matters is that both properties meet the applicable requirements and are held for a qualifying investment or business purpose.
What Properties May Qualify?
A 1031 exchange is generally limited to real property held for investment or productive use in a trade or business.
Potentially qualifying property may include:
- Rental homes
- Multifamily buildings
- Apartment complexes
- Commercial buildings
- Retail properties
- Office buildings
- Industrial properties
- Warehouses
- Vacant land held for investment
- Certain vacation or short-term rental properties held for investment
A primary residence generally does not qualify simply because it is real estate. Property held primarily for resale, such as certain fix-and-flip properties or developer inventory, may also be excluded.
Each investor should speak with qualified tax and legal professionals to determine whether a particular property and ownership structure qualify.
The 45-Day and 180-Day Deadlines Still Apply
Completing an exchange across state lines does not extend the federal 1031 exchange deadlines.
In a standard delayed exchange, an investor generally has:
45 days to identify replacement property
The identification period begins when the relinquished property closes. Potential replacement properties must be identified in writing according to the applicable identification rules.
180 days to complete the exchange
The investor generally must acquire the replacement property within 180 days of transferring the relinquished property or by the due date of the applicable tax return, including extensions, whichever occurs first.
These periods run concurrently. The 180-day period does not begin after the 45-day identification period ends.
Because the deadlines are strict, investors considering property in another state should begin researching markets and potential replacement properties well before the relinquished property closes.
Why a Qualified Intermediary Must Be Involved Before Closing
One of the most important steps in a delayed 1031 exchange is contacting a qualified intermediary before the sale of the relinquished property is completed.
The investor generally cannot receive or control the sale proceeds and later decide to place them into a 1031 exchange. The appropriate exchange documents and qualified intermediary arrangement should be established before closing.
At closing, the exchange proceeds are typically transferred directly to the qualified intermediary and held according to the exchange agreement. The funds are then used toward the acquisition of the qualifying replacement property.
Waiting until after closing may make it impossible to restructure the completed sale as a valid delayed exchange.
State Taxes May Still Follow the Original Property
Although federal 1031 exchange treatment generally allows qualifying exchanges across state lines, state tax treatment can be more complicated.
The state in which the relinquished property is located may continue to treat the deferred gain as income connected to that state. Some states also impose continuing reporting requirements when an investor exchanges in-state property for replacement property located elsewhere.
California, for example, requires certain taxpayers who exchange California property for out-of-state replacement property to file California Form FTB 3840. This allows the state to continue tracking the California-source deferred gain.
Requirements vary by jurisdiction. Investors should not assume that acquiring property in a state with lower or no individual income tax automatically eliminates potential tax obligations to the state where the original property was located.
A qualified tax professional should review:
- The location of the relinquished property
- The location of the replacement property
- The investor’s state of residence
- Applicable nonresident tax obligations
- State withholding requirements
- Annual reporting requirements
- The treatment of a future taxable sale
New Jersey Closing Considerations
Investors selling New Jersey real estate may encounter state-specific forms and closing requirements.
The New Jersey Division of Taxation requires applicable Gross Income Tax real property forms to be completed and recorded when New Jersey real property is transferred.
New Jersey also generally imposes a Realty Transfer Fee on the seller when a deed is recorded, unless an exemption applies.
A federal 1031 exchange does not automatically eliminate every state tax, fee, withholding or filing requirement associated with the closing. The title company, qualified intermediary, attorney and tax professional should coordinate early to determine what will be required.
Does Florida Property Qualify for a 1031 Exchange?
Florida is a popular destination for investors completing out-of-state exchanges.
An investor may potentially sell qualifying investment property in New Jersey, New York or Pennsylvania and purchase qualifying investment real estate in Florida.
The Florida property must still be acquired and held for a legitimate investment or business purpose. Purchasing a Florida home solely for immediate personal use would generally not satisfy the investment-property requirement.
Investors considering a vacation rental or mixed-use property should speak with their tax advisor regarding rental activity, personal use and the investor’s intent at the time of acquisition.
Can You Exchange U.S. Property for Foreign Property?
Although exchanges between different U.S. states may qualify, exchanging domestic real estate for property located outside the United States is treated differently.
Under federal law, real property located within the United States and real property located outside the United States are generally not considered like-kind to each other.
An investor considering international real estate should obtain specialized tax and legal guidance before proceeding.
Planning an Interstate 1031 Exchange
An interstate exchange often involves several moving parts. Investors may need to coordinate:
- The sale of the relinquished property
- The qualified intermediary
- The closing or title company
- Attorneys in one or more states
- Lenders
- Real estate professionals
- Property inspections and due diligence
- State tax filings
- Identification and exchange deadlines
Starting early gives the investor and their professional team more time to address title issues, financing requirements, state-specific documentation and potential replacement properties.
Before You Sell, Speak With Your Exchange Team
A 1031 exchange across state lines can provide investors with valuable flexibility. It may allow an investor to reposition assets, enter a new market, consolidate properties or diversify a real estate portfolio while deferring the recognition of qualifying gain.
However, the exchange must be structured correctly from the beginning.
The best time to discuss a potential 1031 exchange is before the relinquished property closes.
Rally Point 1031 Exchange Services LLC helps investors and their professional teams navigate the qualified intermediary process. With connections throughout New Jersey, New York, Pennsylvania and Florida, our team can help coordinate the exchange process while keeping important deadlines and documentation on track.
Contact Rally Point 1031 Exchange Services LLC before your investment-property closing to learn more about structuring your potential exchange.
Phone: 732-359-2009 Email: Title@RallyPointTitle.com
This article is provided for general informational purposes only and is not intended to constitute tax, legal, investment or financial advice. Rally Point 1031 Exchange Services LLC does not provide tax or legal advice. Investors should consult their attorney, accountant or qualified tax advisor regarding their individual circumstances.