State-Level 1031 Exchange Rules and Differences

Understanding How States Like California and New York Handle Deferred Taxes

While the IRS governs 1031 exchanges at the federal level, not all states treat them the same way. If you’re exchanging property in states like California or New York, it’s important to know how each handles deferred taxes — especially when your exchange crosses state lines.

California

California allows 1031 exchanges, but with a key twist — it tracks deferred gains when your replacement property is located out of state.
This means if you sell a California property and buy one elsewhere, the California Franchise Tax Board (FTB) will keep a record of the deferred gain. When you eventually sell that out-of-state property, California expects its share of the taxes, even years later.

New York

New York also honors 1031 exchanges but is strict about reporting and documentation. Investors must disclose exchange details on state tax filings, including the properties involved and the deferred gain.
Unlike California, New York does not track deferred gains once the property leaves the state, but accurate reporting is essential to avoid state-level audit issues.

Other States

Most states align with federal 1031 rules, but some—like Pennsylvania and Massachusetts—do not recognize 1031 exchanges at all. In those states, deferred gains are still taxable at the state level, even if they’re deferred federally.

When planning a 1031 exchange that spans multiple states, always check local tax rules. A strategy that’s fully deferred under federal law may still trigger state-level taxes.
Consult with a tax professional or qualified intermediary experienced in multi-state exchanges to ensure full compliance — and maximum tax deferral.

Thinking of selling an investment property? Learn how a 1031 exchange can help you preserve more of your profits — and reduce your tax exposure.