1031 Exchange in Connecticut

By Skyline Capital Investments · Updated October 26, 2026 · 7 min read

Does Connecticut recognize 1031 exchanges?

Yes. A Connecticut 1031 exchange works the same way as a federal one, because the Connecticut income tax return starts from federal adjusted gross income. When a valid exchange keeps the gain out of federal AGI, it never reaches the Connecticut return either.

The deferral is worth more than the top rate suggests. Connecticut’s rates run from 2% to 6.99%, and its phase-out and recapture tables push the marginal rate on a large gain a little above 6.99% for many sellers. On a $1,220,000 gain in our capital gains example, the Connecticut share alone was $88,860.

Federal 1031 rules that apply in Connecticut

Connecticut adds no deadlines of its own. The replacement must be identified in writing within 45 days of closing and acquired within 180 days, or by your return due date if that comes sooner. Both properties must be real property held for investment or business use, and a qualified intermediary must hold the proceeds so you never receive them.

Reinvest all the net cash and buy at equal or greater value to defer all of the gain. Cash you keep, or debt you shed without replacing, is boot and is taxed by the IRS and by Connecticut. Our guide to 1031 exchange rules covers identification and boot in detail, and the complete 1031 exchange guide walks through the whole process.

Does Connecticut have a 1031 clawback?

No. Connecticut has no rule that tracks deferred gain after you exchange into another state, and no annual filing like Oregon’s Form OR-24. The states with clawback rules are California, Massachusetts, Montana and Oregon.

That does not make the gain disappear. If you stay a Connecticut resident and later sell the replacement in a taxable sale, the whole gain, including the part rolled over from the Connecticut building, is in your federal AGI and taxed by Connecticut. Whether Connecticut can tax deferred gain after you move away is a question for your CPA before you change residence.

Does Connecticut regulate qualified intermediaries?

Yes. Connecticut is one of nine states with a law on exchange intermediaries, along with California, Colorado, Idaho, Maine, Nevada, Oregon, Virginia and Washington. Its law calls them exchange facilitators and sits in sections 36a-830 through 36a-837 of the General Statutes, in the banking title.

The section headings show what the law covers.

• Section 36a-830: definitions, including who counts as an exchange facilitator.
• Section 36a-831: notice to clients when control of a facilitator changes.
• Section 36a-832: a fidelity bond, and rules on depositing exchange funds.
• Section 36a-833: errors and omissions insurance, or a cash or securities deposit or letter of credit in its place.
• Section 36a-834: regulations and claims for damages.
• Section 36a-835: how exchange funds must be held and invested.
• Sections 36a-836 and 36a-837: prohibited activities and civil actions by clients.

Choosing an intermediary for a Connecticut exchange

Ask any intermediary, in Connecticut or out of state, to show you in writing how it meets Connecticut’s bond, insurance and fund-holding rules before you sign. Then ask how your money will be held: in a separate account in your name or a pooled one, who must sign to move it, and whether you get statements. Ask what happens to your funds if the company is sold, since the law requires notice to clients of a change in control.

Your intermediary also cannot be someone who acted as your agent in the past two years, such as your attorney, accountant, employee or broker. Our guide to choosing a 1031 qualified intermediary covers fees and contract terms.

Nonresident sellers and Connecticut tax

A nonresident who sells Connecticut real estate has Connecticut-source income, because income attributable to the ownership or disposition of real property in Connecticut is taxable to nonresidents. In a full exchange there is no recognized gain to report. If the nonresident takes boot, the recognized part is Connecticut-source and is reported on Form CT-1040NR/PY.

Connecticut also treats certain gains from selling an interest in an entity that owns Connecticut real property as Connecticut-source, under Special Notice 2014(5). Selling the LLC instead of the building does not avoid the tax, and interests in an entity are not like-kind real property, so that route also gives up the exchange.

We found no Connecticut statute that requires withholding at closing when a nonresident sells Connecticut real estate; section 12-705(c) of the General Statutes covers withholding only where the payer and the person paid agree to it. So an exchange has no Connecticut withholding to adjust. A nonresident who takes boot pays the tax on it with the return or through estimated payments.

Connecticut basis after an exchange

Connecticut does not follow federal bonus depreciation. Owners add back 100% of Section 168(k) bonus depreciation in the year it is taken and subtract 25% of the add-back in each of the following years, and they add back 80% of any Section 179 deduction. If you used a cost segregation study on the building you are selling, part of that add-back may still be unrecovered at the exchange.

Keep a Connecticut depreciation schedule alongside the federal one, and carry it to the replacement property. When you finally sell in a taxable sale, your CPA will need both to figure the Connecticut gain.

Exchanges by LLCs and partnerships

The taxpayer that sells must be the taxpayer that buys. If an LLC taxed as a partnership owns the Connecticut building, the LLC has to acquire the replacement; members who want to split up should plan that with advice well before the sale, because a last-minute restructuring can break the exchange.

Any boot the partnership recognizes flows to the members on their Schedule CT K-1. If the entity pays Connecticut’s pass-through entity tax for the year, members claim their share as a credit on Schedule CT-PE, and the return will disallow the credit if the schedule is not attached. Ask the entity’s CPA how the boot will be reported before you agree to take cash out.

Closing costs an exchange does not defer

A 1031 exchange defers income tax only. Connecticut’s conveyance tax under section 12-494 is due on each deed: the state share is 0.75% in general, 1.25% for nonresidential property, and for residential sales of $800,000 or more 0.75% on the first $800,000, 1.25% up to $2,500,000 and 2.25% above that, plus 0.25% for the town and up to another 0.25% in targeted investment communities.

State and town conveyance taxes on the deed, commissions, title charges and loan fees are paid at closing in cash or from the exchange funds, and using exchange funds for some of them can create boot. Ask your intermediary which closing costs can be paid from the account without being treated as cash to you, and budget the rest separately.

Common 1031 exchange paths for Connecticut owners

Connecticut to Connecticut is common for owners moving between markets inside the state, such as from Fairfield County into larger buildings around Hartford or New Haven, or the reverse. Check the replacement town’s mill rate and the date of its next revaluation before day 45: a building in Hartford at 69.95 mills and one in Greenwich at 10.125 mills carry very different tax bills.

Connecticut to another state needs no Connecticut clawback filing. Owners heading to lower-tax states should check the destination’s withholding and intermediary rules before identifying property.

Out-of-state to Connecticut is straightforward on the Connecticut side. An owner leaving a clawback state such as California or Massachusetts may still owe filings to that state.

Worked example: a New Haven exchange with boot

A married couple filing jointly with $180,000 of other income sells an 18-unit building in New Haven for $2,000,000. After $110,000 of selling costs and with an adjusted basis of $670,000, the gain is $1,220,000. The $850,000 mortgage is paid off, and $1,040,000 goes to the intermediary.

They take $120,000 back as cash and reinvest $920,000 as the down payment on a $2,300,000 building, with a new $1,380,000 loan. The $120,000 is boot, so $120,000 of gain is recognized and $1,100,000 is deferred.

Connecticut tax on the boot, figured on the 2025 schedule, is $7,550: their Connecticut tax goes from $8,900 on $180,000 of income to $16,450 on $300,000. Without the exchange the sale would have added $88,860 of Connecticut tax, so the exchange defers $81,310 of it. Had they reinvested all $1,040,000, the full $88,860 would be deferred, along with the federal tax.

Timeline tips for a Connecticut exchange

The 45-day clock starts at closing, so line up likely replacements before you sell. Owners moving between Connecticut towns should add the town tax research to that list, because the mill rate can matter as much as the price.

• Sign the exchange agreement and assign the sale contract before closing.
• Get the intermediary’s Connecticut bond and insurance details in writing when you sign.
• Pull the replacement’s assessment, mill rate and revaluation date before day 45.
• If you sell late in the year, extend your return so the due date does not cut the 180 days short.
• Keep your Connecticut depreciation schedule with the exchange file.

Selling a Connecticut apartment building as part of an exchange

Skyline buys apartment buildings with five or more units in Connecticut. We buy directly, close on your timeline, and can work inside 1031 deadlines. We work with your intermediary on the assignment and can set a closing date that leaves time to find the replacement before your 45 days begin.

For the tax you would owe without an exchange, see Connecticut capital gains tax on real estate. The 1031 exchange calculator runs the federal side for your own numbers.