States Not Allowing Gains To Be Taken Out Of State

While IRC Section 1031 allows any USA investment or business real property to be replaced tax free with any other investment or business real property anywhere in the United States, there are some states that want to make sure they receive their share of the profits.  They only allow an exemption from state taxation if the replacement property is located in that same state.  If the proceeds are reinvested into property located outside of that particular state, it will be considered a taxable event and State income tax will be payable.

Besides costing investors the State taxes, this will also require them to keep track of a separate higher cost basis for the replacement property for State tax purposes than is to be used for Federal taxes. 

Currently, it is our understanding that the following states will only honor the tax free status of a 1031 exchange if the replacement property is also located within their borders.  Rules do change; so double check with the State tax authorities.

Georgia

Mississippi

For the other states, which do allow capital gains that had accrued on their properties to be rolled over into other states, they will expect the deferred taxes to be paid if and when the replacement property is disposed of in a taxable event.   From a practical perspective, this is almost always on the honor system to do this because it is very unlikely that the former states will be informed of a subsequent sale of property in other states.