1031 Exchange in Delaware: 4% Transfer Tax, REW-EST Withholding and DSTs

Delaware's 4% realty transfer tax is owed even when you exchange

Delaware collects a realty transfer tax of 4% of the property's value on nearly every deed, 2.5% to the state and 1.5% to the county or municipality, and by statute the tax 'is to be apportioned equally between grantor and grantee.' On a $2,000,000 sale that is $80,000, with $40,000 on the seller's side of the settlement statement unless the contract shifts it.

An exchange gives no relief. The Division of Revenue's RTT-TAX instructions say that when consideration 'includes the exchange of like kind property,' the full market value of the real estate received is included in the taxable consideration, and the list of exempt conveyances in section 5401 contains no like-kind exemption.

Two details catch investors. Transfers of an intangible interest in a corporation, partnership or trust are taxable when the pre-transfer owners keep less than 80% of the beneficial interest, so selling the entity instead of the deed does not avoid the tax; and the first-time home buyer reduction applies only to a grantee buying a principal residence, never to investment property.

REW-EST: the nonresident prepayment that a full exchange switches off

Under 30 Del. C. section 1126 a nonresident who sells or exchanges Delaware real estate must hand the Recorder of Deeds a return with the deed, and 'the estimated tax reported due ... shall be remitted with the deed to the Recorder before the deed shall be recorded.' The return is form REW-EST, the Real Estate Tax Return - Declaration of Estimated Income Tax, which the Division of Revenue renamed from Form 5403.

The default computation is the seller's gain, net sales price minus adjusted basis, times 6.6% for individuals, trusts and pass-through entities or 8.7% for C corporations. The statute also allows a simpler form that applies the top rate to the amount realized minus recorded liens, which prepays far more when the property has appreciated.

A fully deferred exchange is handled in Part 5 of the form: the seller checks the box stating that 'the sale or exchange is exempt from capital gain recognition because of either Federal or Delaware exemption,' stops there, and pays nothing at recording. Because the form travels with the deed, it must be complete before your qualified intermediary receives the proceeds, so raise it with the settlement attorney when the contract is signed.

Delaware residents: no prepayment, but a 6.6% rate on any recognized gain

Delaware residents are not subject to the REW-EST prepayment; they check the residency box in Part 5 and settle up on the annual return. What they owe on a recognized gain is Delaware's ordinary graduated tax, which climbs quickly: 5.55% from $25,000 and 6.6% on taxable income over $60,000, with no separate capital gains rate.

Delaware taxable income is federal adjusted gross income with state modifications under 30 Del. C. section 1105, so gain the federal return defers under section 1031 never reaches the Delaware return. There is no Delaware addback for like-kind exchanges and no state-level election.

Depreciation recapture sits in the same base, which is why a long-held Delaware rental with low basis produces a Delaware bill approaching 6.6% of the entire gain. The general rules on what qualifies apply unchanged.

No claw-back and no ongoing Delaware filing on deferred gain

Once a Delaware exchange closes, the state has no mechanism to follow the deferred gain. There is no Delaware equivalent of California's form FTB 3840, an annual California return that continues while the gain remains deferred, and a nonresident who exchanges Delaware property for property elsewhere has no further Delaware filing for it.

For a Delaware resident, the deferred gain remains part of the story only because Delaware taxes residents on everything; if the replacement property is later sold for cash while you still live in Delaware, the gain is reported then, at whatever the rate is that year.

Reassessment, not sale, has been moving Delaware property tax bills

Delaware property values were frozen for decades until the Court of Chancery's decision in the Delaware public schools litigation forced all three counties to reassess; New Castle County's prior values had been effective since July 1, 1983. A sale does not trigger a Delaware reassessment, but the countywide revaluations have already reset commercial and apartment values to current market levels.

The follow-on matters to investors: for the 2025-2026 tax year the General Assembly let New Castle County school districts split their rates into separate residential and non-residential rates, the Delaware Supreme Court allowed the revised bills, and apartment, commercial and industrial parcels are classified as non-residential. Investors holding or buying Delaware rentals should read the county's classification of the parcel, since it now drives the school tax rate.

Why the DST is 'Delaware': the Statutory Trust Act in plain terms

The trust behind every DST is created under Delaware's Statutory Trust Act, 12 Del. C. section 3801 and following, by filing a certificate of trust with the Delaware Secretary of State. The Act gives beneficial owners 'the same limitation of personal liability extended to stockholders of private corporations for profit' and provides that no creditor of a beneficial owner may reach the trust's property.

Each investor holds 'an undivided beneficial interest in the property of the statutory trust,' managed by trustees under a governing instrument, and Revenue Ruling 2004-86 examined a trust formed under exactly this statute when it concluded that a properly limited interest can be acquired in a section 1031 exchange. The buildings, however, can be anywhere; Delaware is the legal home of the entity, not usually of the real estate.