Does Arkansas recognize 1031 exchanges?
Yes. Arkansas Code 26-51-412 and the Department of Finance and Administration’s income tax rule on exchanges provide that no gain or loss is recognized when property held for business or investment is exchanged solely for property of a like kind. The rule says that a person other than a dealer realizes no gain from exchanging real estate for other real estate.
So an Arkansas 1031 exchange that works federally works for Arkansas too. The state tax being deferred is smaller than in most income-tax states. Arkansas taxes only 50% of a net capital gain and exempts gain above $10 million, and Act 1 of the 2026 First Extraordinary Session set the 2026 top rate at 3.7%. On long-term gain, that is at most 1.85%.
Federal 1031 rules that apply in Arkansas
Arkansas adds no deadlines of its own, so the federal timeline controls. The identification window is 45 days from the Arkansas closing, in writing, and the purchase must close within 180 days or by your return due date, whichever is sooner. The building you sell and the one you buy must both be real estate held for business or investment, and the sale money has to sit with a qualified intermediary, out of your reach, until the purchase.
To defer all the gain, buy a replacement of equal or greater value and reinvest all the net cash. Cash you keep, and debt paid off without being replaced, is boot. Boot is taxed federally at the usual rates, and in Arkansas the capital gain part of it gets the 50% exclusion. Our guide to 1031 exchange rules covers identification and boot in full, and the complete 1031 exchange guide explains the process from start to finish.
Why the federal deferral is the main event in Arkansas
The federal tax on a large apartment sale is many times the Arkansas tax, so that is what an exchange mostly protects. Federally, appreciation is taxed at up to 20%, straight-line depreciation at up to 25%, Section 1245 recapture at ordinary rates and the whole gain can carry the 3.8% net investment income tax. Arkansas adds roughly 1.85% on the long-term portion and up to 3.7% on Section 1245 recapture.
That changes how some owners weigh their options. An Arkansas owner who wants out of property management and is willing to pay federal tax gives up little to the state by selling outright. An owner who wants to keep investing in real estate still has a strong reason to exchange.
Bonus depreciation and your Arkansas basis
Arkansas did not adopt federal bonus depreciation, according to the Department’s capital gains form, so many owners carry two depreciation schedules: one federal and one Arkansas. In an exchange, each schedule carries over to the replacement property.
If you took bonus depreciation federally on the relinquished building, your Arkansas basis is higher than your federal basis, and your deferred Arkansas gain is smaller than your deferred federal gain. Give your preparer both schedules before closing, and keep the Arkansas schedule with the replacement property’s records. When you eventually sell in a taxable sale, Form AR1000D has lines to adjust the gain for the difference.
Does Arkansas have a 1031 clawback?
No. Arkansas is not one of the four states, California, Massachusetts, Montana and Oregon, that track deferred gain after you exchange into property outside the state. There is no annual Arkansas filing for an out-of-state replacement.
Your residency still matters for the eventual sale. If you remain an Arkansas resident when you sell the replacement in a taxable sale, Arkansas will tax the gain on your resident return, with the 50% exclusion. If you have moved away, ask your CPA how Arkansas and your new state treat the gain built up while you owned Arkansas property.
Withholding at closing on an Arkansas exchange
Ask your title company early what state paperwork applies to your closing, especially if you or your entity are based outside Arkansas. In an exchange, the gain recognized for Arkansas is limited to any boot, since the deferred gain stays off the return.
Federal withholding can still apply. For a seller who is a foreign person, federal FIRPTA withholding can reach an Arkansas exchange closing unless an IRS withholding certificate lowers it. Tell the title company and your intermediary at the start that the sale is part of an exchange, so the closing statement sends the proceeds to the intermediary and not to you.
Does Arkansas regulate qualified intermediaries?
No. Arkansas is not one of the nine states with a law regulating exchange intermediaries: California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia and Washington. An intermediary handling an Arkansas exchange does not have to meet state bonding or account rules.
Federal rules still bar some people from serving. The intermediary also cannot be your agent from the previous two years, which rules out your attorney, accountant, broker and employees. Without state rules, the protections have to come from the exchange agreement.
- Proof of a fidelity bond and errors and omissions coverage.
- Your funds in a segregated account or qualified escrow in your name.
- Withdrawals that need your signature as well as the intermediary’s.
- Statements showing the balance and any interest.
- A written answer on how your funds are protected if the intermediary fails.
Common 1031 exchange paths for Arkansas owners
Arkansas exchanges tend to follow one of three paths.
Arkansas to Arkansas is common in Northwest Arkansas and the Little Rock area, where owners trade smaller buildings in Fayetteville, Rogers or North Little Rock for larger ones. The gain stays inside the same Arkansas rules, and the owner keeps one set of state filings.
Arkansas to a neighboring state, such as Texas, Oklahoma, Tennessee or Missouri, suits owners who want a bigger market or a different tax mix. Arkansas has no tracking rule, so the exchange creates no Arkansas filing beyond the year of sale.
Arkansas into a Delaware statutory trust suits owners who want to stop managing property. A DST interest can count as replacement real property, though you give up control over operations and timing.
Worked example: an Arkansas exchange into Oklahoma
An owner sells a 30-unit building in Fayetteville for $2,200,000. Selling costs are $88,000 and the adjusted basis, the same for federal and Arkansas purposes, is $900,000, so the gain is $1,212,000. Of that, $40,000 is Section 1245 recapture on personal property and $260,000 is straight-line depreciation on the building.
The owner sends all net proceeds to the intermediary and buys a $2,400,000 building in Tulsa with a larger loan than the one paid off. No cash or debt relief is left over, so the full $1,212,000 is deferred.
Arkansas tax deferred: half of the $1,172,000 of long-term gain is $586,000, and at 3.7% that is $21,682; the $40,000 of recapture at 3.7% adds $1,480, for $23,162. Federal tax deferred, assuming the owner is in the 32% bracket for the recapture: $12,800 on recapture, $65,000 at 25% on the depreciation, $182,400 at 20% on the remaining $912,000 and $46,056 of net investment income tax, for $306,256.
Had the owner kept $80,000 in cash, that $80,000 would be boot. If it were taxed as long-term capital gain, the Arkansas tax on it would be about $1,480.
| Item | Amount |
|---|---|
| Sale price | $2,200,000 |
| Total gain | $1,212,000 |
| Arkansas tax deferred | $23,162 |
| Federal tax deferred | $306,256 |
| Total tax deferred | $329,418 |
Partnerships, LLCs and splitting up co-owners
The same taxpayer has to sell the old property and buy the new one. When an Arkansas LLC taxed as a partnership owns the building, the LLC is the taxpayer, and it must take title to the replacement. A member who wants cash instead of a new building cannot simply take a share of the proceeds without that share being taxed.
Owners who expect to part ways often restructure well ahead of a sale, for instance into tenancy-in-common interests, so each can exchange or sell alone. The IRS looks at how close to the sale that change happens, so plan it with your CPA months in advance, not in the last weeks before closing. A disregarded single-member LLC is treated as its owner, which gives more flexibility on how title is held on each side of the exchange.
Timeline tips for an Arkansas exchange
Start looking for the replacement before you close. The 45-day identification period begins at closing and does not pause for weekends or holidays.
- Sign the exchange agreement and assign the sale contract to the intermediary before closing.
- Tell the title company in writing that the proceeds go to the intermediary.
- If you sell late in the year, file an extension so your return due date does not cut the 180 days short.
- Carry both your federal and Arkansas depreciation schedules to the replacement property.
- Keep the exchange file with the replacement’s records for the day you sell it.
Selling an Arkansas apartment building as part of an exchange
Skyline buys apartment buildings with five or more units in Arkansas. We buy directly, close on your timeline, and can work inside 1031 deadlines. We work with your intermediary on the contract assignment and can set a closing date that leaves time to line up a replacement before your 45 days begin.
For the tax you would owe without an exchange, see Arkansas capital gains tax on real estate. The 1031 exchange calculator runs the federal side for your own figures, and our guide to choosing a 1031 qualified intermediary covers fees and contract terms.
Selling? Spread the tax with seller-carry terms
If a large tax bill is what is keeping you from selling, an installment sale may help. When you carry part of the price as a note, the gain is generally reported as you receive payments instead of all in the year of sale. Some parts of the gain, such as certain depreciation recapture, can still be due up front, so run the numbers with your CPA first.
Skyline Capital Investments buys apartment buildings with five or more units and can offer seller-carry terms, or a delayed closing that fits your 1031 timeline. Send the address and unit count and we typically respond within 48 hours. How seller financing works · How an installment sale is taxed · Seller financing calculator.
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