Do states honor 1031 exchanges, or can my old state still tax me?
Most states follow federal 1031 treatment, but several — California most aggressively — impose clawback rules: exchange out of California land and the state tracks the deferred gain forever, taxing its share whenever you finally sell for cash. California requires an annual filing (Form 3840) to keep the tail alive.
The clawback states take the position that gain accrued on their soil belongs to them regardless of where the money goes. Sell California farmland, exchange into Texas ranchland, and California expects Form FTB 3840 every year until the deferred gain is recognized. Skip the filing and the Franchise Tax Board can assess the tax immediately. Oregon, Massachusetts, and Montana run similar tracking regimes.
Moving in the other direction has its own wrinkle: exchange into a high-tax state and your eventual cash sale is taxed there at full freight, including gain that accrued elsewhere. And Pennsylvania did not recognize 1031 at all for state purposes until 2023 — a reminder that state conformity shifts and is worth re-checking each year.
None of this usually kills the economics — deferral still wins — but it changes the long game, especially if your endgame is holding until death for the basis step-up, which generally extinguishes clawback claims too. Map the state angle with your CPA before choosing which state you exchange into.
The Turnrow angle
Turnrow lends in all 50 states, so the tax strategy can drive the geography rather than the other way around.
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