1031 Exchange Rules in New York
How a 1031 Exchange Works (the federal rules that apply everywhere)
Section 1031 of the Internal Revenue Code lets you defer capital gains tax when you exchange real property held for investment or business use for like-kind real property. After the 2017 Tax Cuts and Jobs Act, only real property qualifies — the old equipment and personal-property exchanges are gone.
The timing is strict. From the day you close on the relinquished property, you have 45 days to identify replacement property in writing and 180 days to close. A qualified intermediary must hold the sale proceeds the entire time; if you take control of the cash, the exchange fails. Anything you pull out, or any drop in debt or value on the replacement side, is “boot” and gets taxed now.
That much is identical in Buffalo, Brooklyn, or Boise. New York adds its own layer.
The New York closing-table issue: Form IT-2663
New York conforms to the federal 1031 rules, so a valid exchange defers your New York income tax along with the federal. But New York protects its revenue with a withholding rule aimed at nonresidents. When a nonresident sells New York real property, the state generally requires estimated personal income tax to be paid at closing using Form IT-2663, the Nonresident Real Property Estimated Income Tax form.
In a 1031 exchange, you do not owe that tax yet — the whole point is deferral. So you file the IT-2663 and check the exemption box indicating the sale is part of a Section 1031 like-kind exchange. Done correctly, no withholding comes out of your proceeds at closing. Skip it, and New York can hold back estimated tax on a gain you are not even recognizing, leaving you to chase a refund later.
The transfer taxes the exchange does not defer
Here is what New York investors forget: a 1031 exchange defers income tax on the gain, not the transfer taxes on the deeds. New York State charges a real estate transfer tax, and New York City layers its own Real Property Transfer Tax (RPTT) on top — which for higher-value commercial and multifamily deals in the city runs to 2.625%. Those apply to the conveyance regardless of the exchange. On a Manhattan or Brooklyn building, the transfer taxes alone can be a six-figure line item, so build them into the deal math before you assume the swap is “tax-free.”
Why the deferral is worth more in New York City
New York gives capital gains no special rate. A real estate gain is taxed as ordinary income, where the state rate reaches 10.9%, and a New York City resident adds city tax up to 3.876% on top. Stack that on the federal 20% plus the 3.8% net investment income tax and a city investor can lose well over a third of the gain to a straight sale. For a long-held NYC rental, the 1031 deferral is one of the few tools that keeps a meaningful chunk of equity working instead of going to three different tax authorities at once.
A New York example
You own a Queens four-unit you bought for $900,000, now worth $1.8 million. You live in Florida now, so you are a New York nonresident. Sell outright and New York wants estimated tax withheld at closing through Form IT-2663, plus you owe state tax on the roughly $900,000 gain at rates up to 10.9%. Exchange into a larger upstate or out-of-state property instead, file the IT-2663 with the 1031 exemption box checked, and no withholding is taken — but the New York State and City transfer taxes on the Queens sale still apply.
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Frequently Asked Questions
Does New York recognize 1031 exchanges?
Yes. New York conforms to Section 1031, so a properly structured federal exchange also defers your New York State (and New York City, for residents) income tax on the gain. New York does not impose an extra annual tracking form the way California does. The main New York-specific step is the nonresident withholding exemption at closing, handled on Form IT-2663.
I am a nonresident selling a New York property in a 1031 exchange. Do I owe withholding?
Not if you document the exchange. New York normally requires a nonresident to pay estimated income tax at closing on the sale of New York real property using Form IT-2663. Because a 1031 exchange defers the gain, you file the IT-2663 and check the box claiming the Section 1031 exemption, and no estimated tax is withheld. If the form is not filed or the exemption is not claimed, the title company may withhold tax you do not yet owe, and you would have to recover it by filing a New York return.
Do New York City and State transfer taxes apply to a 1031 exchange?
Yes. A 1031 exchange defers the income tax on your gain, but it does not exempt the deeds from transfer tax. New York State real estate transfer tax applies, and within the five boroughs the New York City Real Property Transfer Tax applies on top — up to 2.625% on higher-value commercial and multifamily transfers. These are due on the conveyance whether or not you defer the gain, so factor them into the cost of the exchange.
Is there a separate New York capital gains tax rate?
No. New York taxes capital gains as ordinary income, with a top state rate of 10.9%. A New York City resident adds city income tax of up to 3.876%, so the combined state-and-city rate on a large gain can approach 14.8% before any federal tax. There is no reduced rate for long-term gains at the state level. That is exactly why the 1031 deferral is valuable for city investors — see our New York capital gains guide for the full breakdown.
Can I exchange a New York City property for one outside the state?
Yes. The federal exchange works normally, and New York defers your state tax on the gain. As a practical matter, file Form IT-2663 at closing with the 1031 exemption claimed if you are a nonresident, and remember the New York State and City transfer taxes still apply to the New York leg. Unlike California, New York does not require an annual information return to keep tracking the deferred gain after the exchange.