Can I 1031 exchange into a property in another state?

Federal law draws one line, and it is the national border

Section 1031(h) is the whole of the geography rule: "Real property located in the United States and real property located outside the United States are not property of a like kind." There is no companion sentence about state lines, because there is no state-line problem.

The IRS restates the position with the national boundary as the one exception it names. A Michigan apartment building and a Tennessee self-storage facility qualify against each other without argument.

State-by-state mechanics, deadlines and withholding rules are collected at our 1031 exchange rules by state hub, with a page for each state.

Your intermediary can be anywhere, but your closing customs will not be

Nothing in the regulations ties the qualified intermediary to either state, so you do not need to change intermediaries because the replacement is out of state. Choose on safety and process instead, as How do I choose a safe qualified intermediary? sets out.

What does differ is the closing itself. Some states close through title companies and escrow officers; others close through attorneys, with different customs for who drafts the deed and who holds funds. Tell the intermediary early which state the replacement is in so the assignment and notice arrive in the right form.

The closing table mechanics are the same either way, and Does a 1031 exchange delay my closing? describes what the intermediary actually does there.

California keeps its claim and gives it a form number: FTB 3840

California requires taxpayers who exchange real property located in California for like-kind property located outside California to file an annual information return, form FTB 3840, for taxable years beginning on or after 1 January 2014. The requirement applies to all taxpayers who conduct the exchange, "regardless of residence status or commercial domicile."

The Franchise Tax Board explains the logic in its own instructions: the source of a gain from property located in California is determined when the gain is realised, and "the source of such gain or loss is preserved without regard to when such gain or loss may be recognized." The form is filed for the year of the exchange and each subsequent year until the California-sourced deferred gain is recognised on a California return.

You check the "Annual" box each year, and the "Final" box in the year the replacement is sold or otherwise disposed of, attaching a statement explaining the disposal. A separate form is required for each exchange, and the authority is R&TC sections 18032 and 24953.

• File even if you have no other California filing requirement, signing the form and posting it to the FTB
• Fail to file and also file no return, and the FTB may estimate net income and issue a Notice of Proposed Assessment with tax, penalties and interest
• California conforms to the federal real-property-only limit for exchanges initiated after 10 January 2019, but for individuals only above $500,000 AGI on a joint, head-of-household or surviving-spouse return, or $250,000 on any other individual return
• Detail for the selling state sits at 1031 exchange rules in California

Oregon does the same job with Form OR-24

Oregon's Publication OR-17 states the rule under ORS 316.738 and 317.327: if Oregon real property is exchanged for real property in another state, include Form OR-24 with your Oregon return in the year of the exchange, or submit it through Revenue Online.

The annual obligation is worded as plainly as California's. "Submit the form to us each year, until you've disposed of the like-kind property, even if you don't have to file an Oregon income tax return."

When the gain is finally reported federally, a taxpayer who was an Oregon resident at the time of the exchange files an Oregon return for the Oregon portion, and someone who is a non-resident when the gain is reported files Form OR-40-N. See 1031 exchange rules in Oregon.

A hypothetical: leaving California without leaving California's tax net

Suppose you sell a California rental for $900,000, carrying $500,000 of deferred gain, and buy a Texas building. Texas levies no personal income tax on the rent, so the ongoing position improves immediately.

The $500,000 does not become Texan. It stays California-sourced, you file form FTB 3840 every year, and when you eventually sell the Texas building for cash rather than exchanging again, California expects its share of that preserved gain alongside the federal bill.

The way out of that is not geography but sequence: keep exchanging, or hold until basis steps up. Whether state tax is deferred at all is answered at Does a 1031 exchange defer state capital gains tax too?, and money held back at the closing table at Will the state withhold tax at closing even though I'm doing a 1031 exchange?. Get the filing calendar for both states from your CPA or attorney, because the obligations diverge sharply.

Forty-five days is the real constraint when you have never seen the market

Distance does not buy time. The identification deadline and the closing deadline run exactly as they would for a property across the road, and there is no hardship extension for an unfamiliar market.

That means the work has to happen before the relinquished property closes, not after. Line up the inspector, the property manager and the lender in the target market while you are still in escrow, and read How do I properly identify replacement property? before day one.

Non-resident income tax returns in the replacement state, local licensing and the practical cost of managing at a distance all belong in the decision; Remote and out-of-state landlord exit strategies weighs them.

When the point is to stop being a landlord anywhere

Plenty of sellers crossing a state line are not chasing a better market so much as leaving a difficult one. If the goal is to stop fielding calls about a property you cannot drive to, a passive replacement solves the problem the move was meant to solve.

A traditional DST or a direct title security puts institutional real estate on the other side of the exchange with no management and a closing timetable measured in days rather than weeks, which also protects the 45-day date.

The trade-offs, including the fact that a DST investor holds a fixed position rather than a controllable asset, are set out at Moving from active rentals to a truly passive portfolio and DST illiquidity.