Does Kentucky recognize 1031 exchanges?
Yes. Kentucky income tax starts from federal income, and gain deferred under Section 1031 never reaches it. For taxable years beginning on or after January 1, 2026, KRS 141.010 defines the Internal Revenue Code as the code in effect on December 31, 2025, after an update by 2026 Ky. Acts ch. 161 that took effect July 15, 2026. Section 1031 has been part of the code throughout, so the deferral carries over to Kentucky.
At the 3.5% rate that took effect in 2026, every $1 million of deferred gain holds back $35,000 of Kentucky tax. That is a fraction of the federal tax deferred on the same gain, which is why Kentucky owners exchange mainly for the federal saving.
Federal 1031 rules that apply in Kentucky
Kentucky sets no deadlines of its own. You have 45 days after the sale closes to identify replacement property in writing and 180 days, or the due date of your return if earlier, to buy it. Both properties must be real property held for investment or business use, and a qualified intermediary must hold the proceeds so you never touch them.
Full deferral takes two things: replacement property worth at least the net sale price, and reinvestment of all the net cash. Anything less creates boot, whether as cash in hand or as debt paid off and not replaced. Our 1031 exchange rules guide covers identification methods and boot in detail, and the main 1031 exchange guide explains the whole process from listing to closing.
Does Kentucky have a 1031 clawback?
No. Kentucky does not follow deferred gain into another state. California, Massachusetts, Montana and Oregon are the states with clawback or tracking rules. A Louisville owner who exchanges into a building in Indianapolis or Knoxville files no annual Kentucky form for the replacement.
If you are still a Kentucky resident when you later sell the replacement in a taxable sale, the gain is part of your Kentucky income that year. If you have moved and the replacement sits outside Kentucky, no Kentucky rule reaches back for the gain deferred on the Kentucky building.
Buyers coming in from a clawback state bring their own paperwork. If you sell your Kentucky building to an investor completing an exchange out of California or Oregon, the tracking filings belong to that buyer.
Kentucky withholding at closing and how an exchange affects it
We found no Kentucky rule requiring a title company to withhold income tax from an individual seller’s proceeds. Nonresidents still owe Kentucky tax on gain they recognize, since KRS 141.020(4) taxes nonresidents on income from tangible property located in Kentucky.
Pass-through entities are where withholding applies. KRS 141.206(4) requires a partnership, LLC or S corporation to withhold Kentucky tax on each nonresident individual owner’s share of income, distributed or not, at the maximum KRS 141.020 rate, 3.5% for 2026. Gain deferred in a full exchange is not part of that income, so it adds nothing to the withholding. Only recognized gain, such as cash boot or mortgage boot, flows to the nonresident owners and increases what the entity withholds.
An entity can skip withholding for an owner who filed and paid Kentucky tax for the prior year, if it shows the Department of Revenue that the owner did. That exemption is lost if the owner later fails to file or pay.
- Tell the title company and your intermediary at the start that the sale is part of an exchange.
- If an LLC sells, have the CPA confirm what recognized gain, if any, will reach nonresident members.
- Budget for the deed tax: KRS 142.050 charges the grantor 50 cents per $500 of value, and its exemptions do not cover exchanges.
Kentucky depreciation records in an exchange
Kentucky keeps its own depreciation rules, and they follow you through an exchange. KRS 141.0101 allows depreciation only under Section 168 as it stood on December 31, 2001 for property placed in service after September 10, 2001, which excludes bonus depreciation, and ties Section 179 to the 2001 or 2003 federal rules depending on when the property was placed in service.
In an exchange the basis of the old building carries into the new one, and so does any gap between your federal and Kentucky basis. If you took bonus depreciation federally, your Kentucky basis is higher. Keep both schedules with the exchange file, because the Kentucky gain on a later taxable sale is figured from the Kentucky basis.
Trading up adds a second layer. When you buy a more expensive replacement with new debt or added cash, the extra cost is new basis. If your CPA runs a cost segregation study on the replacement and takes bonus depreciation on that new basis federally, Kentucky again allows only the depreciation under its 2001 rules, so the federal and Kentucky schedules drift further apart. Plan for that before you count on bonus depreciation to shelter rents on your Kentucky return.
Does Kentucky regulate qualified intermediaries?
No. Kentucky is not one of the nine states with laws governing exchange intermediaries: California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia and Washington. No Kentucky statute requires an intermediary to carry a bond or insurance or to segregate exchange funds.
For up to 180 days your sale proceeds sit with the intermediary, protected only by the exchange agreement and the firm’s own practices. Ask before you sign.
- Will my funds be in a separate account in my name, or pooled with other clients’ money?
- Does a withdrawal need my written approval?
- What fidelity bond and errors and omissions coverage do you carry, and in what amounts?
- Are you free of any disqualifying relationship, such as acting as my attorney, CPA, employee or broker in the past two years?
Common 1031 exchange paths for Kentucky owners
Kentucky to Kentucky is common for owners consolidating smaller buildings into one larger property in Louisville or Lexington, or moving from an older property to a newer one. There are no extra state filings. The replacement is revalued every year by the county PVA at fair cash value, so model the property tax at the price you pay, not the seller’s assessment.
Kentucky to out of state appeals to owners following family or moving toward faster-growing markets. Some look at Tennessee, which has no personal income tax, or at Indiana and Ohio metros a short drive away. Kentucky adds no filing burden, but check the destination state’s withholding and transfer tax rules.
Owners who want to stop managing property sometimes buy into a Delaware statutory trust, which can qualify as replacement real property. Our page on 1031 exchanges into a DST explains how that works.
Worked example: a Lexington exchange with mortgage boot
An owner sells a 22-unit building in Lexington for $1,800,000. After $90,000 of selling costs and with an adjusted basis of $650,000, the gain is $1,060,000. The $700,000 mortgage is paid at closing, and the intermediary receives all $1,010,000 of net proceeds. The owner pays the deed tax of $1,800 at closing.
Within 180 days the owner buys a $1,600,000 building in Bowling Green with the $1,010,000 of exchange funds and a new $590,000 loan. No cash came out, but the new loan is $110,000 smaller than the one paid off, and the owner added no cash to make up the difference. That $110,000 is mortgage boot. The owner recognizes $110,000 of gain and defers $950,000.
At 3.5%, the Kentucky tax on the boot is $3,850, and the Kentucky tax deferred is $33,250. Had the owner bought a building priced at the $1,710,000 net sale price or more, with a loan of at least $700,000 or added cash, all $1,060,000 would be deferred, holding back $37,100 of Kentucky tax.
| Item | Amount |
|---|---|
| Sale price | $1,800,000 |
| Total gain | $1,060,000 |
| Deed transfer tax (KRS 142.050) | $1,800 |
| Old mortgage paid off | $700,000 |
| New loan on replacement | $590,000 |
| Mortgage boot | $110,000 |
| Gain deferred | $950,000 |
| Kentucky tax on boot (3.5%) | $3,850 |
| Kentucky tax deferred (3.5%) | $33,250 |
Timeline tips for a Kentucky exchange
Start the search early. The 45-day clock starts at closing and keeps running through weekends and holidays, and a Kentucky owner buying in a new metro needs time to tour buildings, review rent rolls and line up financing before the identification deadline.
- Sign the exchange agreement and assign the sale contract to the intermediary before closing.
- If the sale closes late in the year, extend your return so the due date does not cut the 180 days short.
- If you buy in Kentucky, ask for the replacement’s PVA value and last three tax bills, and expect the value to move toward your price.
- Line up the loan early if you are trading up, since replacing the old debt is what keeps mortgage boot at zero.
Selling a Kentucky apartment building as part of an exchange
Skyline buys apartment buildings with five or more units in Kentucky. We buy directly, close on your timeline, and can work inside 1031 deadlines. We sign the assignment to your intermediary and can set a closing date that gives you room to find a replacement before your 45 days begin.
For the tax you would owe without an exchange, see Kentucky capital gains tax on real estate. The 1031 exchange calculator runs the federal numbers on your own sale.
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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