How Landowners Can Use a 1031 Exchange in 2025 to Avoid Capital Gains Tax

While federal law governs the main structure of a 1031 exchange, each state has its own approach to taxing deferred gains. Some conform. Others don’t. A few tax out-of-state replacements even years later.

Here’s how it breaks down:

States That Track Deferred Gains

• California: You can defer federal taxes, but if you move your gain out of state, California will tax it later (Source: California FTB).
  
  
• Massachusetts: Allows exchanges but requires extra paperwork and gain tracking.
  
  
• New Jersey: Partially conforms—some restrictions apply.
  
  
• Vermont: Follows federal rules, but with heightened audit scrutiny.
  
  

States That Don’t Recognize 1031

• Pennsylvania: Requires tax to be paid, even if you defer federally (Source: PA Dept. of Revenue).
  
  
• Wisconsin: Similar rules—state tax due on the gain even if federal is deferred.
  
  

States With No Income Tax

• Texas, Florida, Washington, Tennessee, Nevada, South Dakota, Wyoming, Alaska: These states don’t tax income, so there’s no state-level impact from a 1031 exchange.
  
  

Other Conforming States (Follow Federal 1031)

New York, Illinois, Arizona, Georgia, Oregon, North Carolina, Michigan, Ohio, Colorado, Utah, Hawaii, Indiana, Missouri, and more: All follow federal 1031 exchange rules. Still, they often require forms to track the exchange, especially if properties cross state lines.