1031 Exchange in Massachusetts

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

Does Massachusetts recognize 1031 exchanges?

Yes. A Massachusetts 1031 exchange defers state tax the same way it defers federal tax, because the state’s personal income tax follows the Internal Revenue Code as amended and in effect on January 1, 2024, with listed exceptions that do not include Section 1031. Section 1031 has covered only real property since 2018, and that is the version Massachusetts follows.

Gain you defer is gain that would otherwise be taxed at 5%, and at 9% on the part of your income above the 2026 surtax threshold of $1,107,750. On a large building sale the surtax alone can be tens of thousands of dollars, which a full exchange pushes into the future.

Because Massachusetts ties its income tax to the Code as of a fixed date, a future federal change to Section 1031 might not apply in Massachusetts right away. For now the state and federal exchange rules match.

Federal 1031 rules that apply in Massachusetts

Massachusetts adds no deadlines of its own. You have 45 days from the sale to identify replacement property in writing and 180 days, or your return due date if that comes first, to close. Both properties must be real property held for investment or business use, and a qualified intermediary must hold the sale proceeds so you never have access to them.

To defer all of the gain, buy replacement property of equal or greater value and reinvest all the net cash. Cash you keep and debt relief you do not replace are boot, taxed by the IRS and by Massachusetts in the year of sale. Our guide to 1031 exchange rules covers identification and boot in detail, and the complete 1031 exchange guide explains the whole process.

Why the surtax makes deferral worth more in Massachusetts

The 4% surtax is calculated on a single year’s taxable income, so the size of the gain in one year decides how much of it is taxed at 9%. An outright sale puts the whole gain in one year. An exchange recognizes only boot that year and leaves the rest for a later sale.

That matters for planning even after the exchange. If you later sell the replacement property in a year when your other income is low, or sell it in pieces over several years, less of the deferred gain may land above the threshold than if you had sold the original building outright. The threshold is adjusted for inflation each year, so check the figure for the year you expect to sell.

Massachusetts withholding at closing and how an exchange affects it

For closings on or after November 1, 2025, a nonresident who sells Massachusetts real estate for $1,000,000 or more has tax withheld at closing under 830 CMR 62B.2.4. The default is 4% of the gross price plus 4% of the amount above the surtax threshold. A seller can elect 5% of the estimated net gain, plus the surtax on any amount above the threshold. The closing attorney or other withholding agent files Form NRW within 10 days of closing.

An exchange changes the math. The regulation says withholding is generally not required on gain deferred under Section 1031, but it is required on gain recognized under Section 1031(b), which is boot. On the Transferor’s Certification, the seller marks that gain will be deferred through a qualified intermediary, and the deferred portion reduces the amount that withholding is figured on.

• Full-year residents, pass-through entities and corporations with a continuing Massachusetts presence are exempt, but must still sign the Transferor’s Certification.
• Tell your closing attorney at the start that the sale is part of an exchange, and give them the intermediary agreement.
• If the exchange fails, the seller must notify the Department of Revenue in writing and pay the withholding within 10 days after the 45-day or 180-day period runs out.

Does Massachusetts have a 1031 clawback?

Yes, for nonresident sellers. A nonresident who defers gain on a Massachusetts sale must acknowledge the amount of deferred gain on the Transferor’s Certification and consent to personal jurisdiction in Massachusetts for the determination and collection of the tax that will be due when the gain is realized. Massachusetts keeps its claim on the gain your building built up, even if you move the money to another state.

Massachusetts is one of four states with a clawback of this kind, along with California, Montana and Oregon. Unlike Oregon’s Form OR-24 or California’s annual information return, we found no separate yearly Massachusetts filing for out-of-state replacement property on the Department of Revenue pages we reviewed. The consent itself is the hook. Keep a copy of the certification with the replacement property’s records, since the gain stays traceable to your Massachusetts sale.

Massachusetts residents are in a different position. A resident is taxed on all income wherever it is earned, so a later taxable sale of the replacement property is taxed by Massachusetts in any case while you live in the state.

Does Massachusetts regulate qualified intermediaries?

No. Massachusetts is not one of the nine states with a qualified intermediary law. Those states are California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia and Washington, and their laws set bonding, insurance or trust account rules for exchange companies.

Without a state law, protecting your exchange funds is a matter of contract and due diligence. Ask for proof of a fidelity bond and errors and omissions coverage, insist on a segregated account in your name or a qualified trust account, find out who can authorize a withdrawal and ask for written statements. Your intermediary cannot be someone who acted as your agent in the past two years, such as your attorney, accountant or broker. Our guide to choosing a 1031 qualified intermediary has a full checklist.

Common 1031 exchange paths for Massachusetts owners

Massachusetts owners mostly follow one of three paths.

Massachusetts to Massachusetts keeps everything in one tax system. A Boston-area owner trading into a larger building in Worcester or the Pioneer Valley defers the 5% tax and surtax and, if a resident, has no withholding at closing.

Massachusetts to another state is a common choice for owners looking at nearby New Hampshire or at markets farther south and west. A nonresident seller signs the deferred-gain consent, faces withholding on any boot and should expect Massachusetts to tax the deferred gain when it is realized.

Another state into Massachusetts carries no Massachusetts clawback, but an owner coming from California or Oregon may still owe that state’s filings on its own deferred gain.

Worked example: a nonresident’s Massachusetts exchange

An owner who lives in New Hampshire sells a 14-unit building in Lowell for $2,000,000. After $100,000 of selling costs and with an adjusted basis of $800,000, the gain is $1,100,000. The $850,000 loan is paid off, leaving $1,050,000. She takes $150,000 in cash at closing and the intermediary receives $900,000.

She buys a $2,050,000 building in Manchester, New Hampshire, with the $900,000 and a new $1,150,000 loan. The $150,000 she kept is boot, so $150,000 of gain is recognized and $950,000 is deferred. Massachusetts tax on the boot at 5% is $7,500, since her Massachusetts-source income stays under the surtax threshold. The Massachusetts tax deferred, at today’s 5% rate, is $47,500.

At closing she signs the Transferor’s Certification, marks the deferral through a qualified intermediary and elects the net gain method, so the withholding is 5% of the $150,000 recognized gain, or $7,500. Had she not shown the exchange or signed the certification, the default would have been $115,690: 4% of $2,000,000 plus 4% of the $892,250 above the threshold.

Her consent means Massachusetts can collect tax on the $950,000 when that gain is realized, for example in a later taxable sale of the Manchester building. Had she sent all $1,050,000 to the intermediary and reinvested it, the full $1,100,000 would be deferred and nothing would be withheld.

Timeline tips for a Massachusetts exchange

Line up the intermediary before you sign the purchase and sale agreement, because the paperwork at closing now includes the Transferor’s Certification.

• Sign the exchange agreement and assign the contract before closing.
• Give the closing attorney the intermediary’s details early so Form NRW is prepared correctly.
• Decide before closing whether to elect the net gain withholding method.
• If you sell late in the year, extend your return so the due date does not cut the 180 days short.
• Keep the certification and exchange documents with the replacement property’s records.
• Before any later sale of the replacement, ask your CPA how that year’s surtax threshold compares with the deferred gain you expect to recognize.

Selling a Massachusetts apartment building as part of an exchange

Skyline buys apartment buildings with five or more units in Massachusetts. We buy directly, close on your timeline, and can work inside 1031 deadlines. We work with your intermediary and closing attorney on the assignment and the certification, and we can set a closing date that gives you room to find the replacement first.

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