1031 Exchange in South Dakota

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

Does South Dakota recognize 1031 exchanges?

Yes, in the way that counts: a valid federal 1031 exchange defers all of the income tax an individual owes on a South Dakota sale, because the state has no income tax. The Department of Revenue describes South Dakota as one of seven states that does not impose a state income tax. There is no conformity statute to check, no state exchange form and no deferred state gain waiting to be taxed later.

So a South Dakota 1031 exchange is a federal exercise. Section 1031 of the Internal Revenue Code and Treasury Regulation 1.1031(k)-1 set every deadline and requirement.

Federal 1031 rules that apply in South Dakota

Every South Dakota exchange must meet these federal requirements. Miss one and the gain is generally taxable on your federal return.

• Our 1031 exchange rules page explains each requirement with dates, and the 1031 exchange guide covers the types of exchange.
• Weekends and holidays count toward both deadlines, and neither moves to the next business day.

Withholding and the transfer fee on a South Dakota exchange

South Dakota has no state withholding at closing, so there is nothing to waive when you exchange. The title company will not hold back state tax from a resident or nonresident seller.

The state cost that does apply is the real estate transfer fee under SDCL 43-4-21: 50 cents for each $500 of value, paid by the grantor. On a $2,000,000 relinquished property that is $2,000. The exemption list in SDCL 43-4-22 covers transfers such as those between an LLC and its members, mergers and gifts, but it has no exemption for a deed that is part of a like-kind exchange, so budget the fee as a selling cost. If your replacement is also in South Dakota, its seller pays the fee on that deed.

Selling costs paid from exchange funds, including the transfer fee and commission, reduce the amount realized, which is the figure your replacement must equal or exceed for full deferral.

Federal FIRPTA withholding still applies to foreign sellers, generally 15% of the amount realized, and an exchange does not remove it automatically. A foreign owner needs an IRS withholding certificate arranged before closing.

Is there a South Dakota clawback on 1031 exchanges?

No. South Dakota never taxed the gain, so it has nothing to claw back. You can sell in Sioux Falls and buy in Arizona, Texas or North Dakota without a South Dakota filing.

The question runs the other way for owners coming into South Dakota. California, Massachusetts, Montana and Oregon track gain deferred on property in their state when it is exchanged for out-of-state property. A Montana owner who trades a Billings building for one in Rapid City keeps Montana’s filing duties, and Montana can tax the deferred Montana gain when the South Dakota property is later sold in a taxable sale.

North Dakota, Minnesota, Iowa and Nebraska are not on that clawback list. An owner from one of those states who exchanges into South Dakota still reports to the home state while a resident, since states tax residents on their income, but the home state does not keep a separate tracking claim on the old building.

Exchanging from North Dakota into South Dakota

The two states share a long border, so this route comes up. North Dakota follows the federal 1031 rules because its return starts from federal taxable income, and it has no clawback, so a Fargo owner who trades into a Sioux Falls building files nothing extra with North Dakota for the exchange itself.

While that owner remains a North Dakota resident, North Dakota taxes the rents from the South Dakota building and any later taxable sale, after its 40% exclusion on net long-term capital gain. An owner who becomes a South Dakota resident before a later taxable sale of the South Dakota building is generally outside North Dakota’s reach, since North Dakota taxes nonresidents on income from property located in North Dakota. Our 1031 exchange in North Dakota guide covers that side.

Does South Dakota regulate qualified intermediaries?

No. South Dakota is not one of the nine states with a law covering exchange intermediaries: California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia and Washington. In South Dakota the safety of your exchange money depends on the firm you choose and the agreement you sign.

Federal rules bar anyone who was your agent in the two years before the sale, such as your attorney, accountant, employee or real estate broker, as well as related parties. Ask how funds are held (a segregated account or qualified escrow), whether withdrawals need your signature, and what fidelity bond and errors and omissions coverage the firm carries. Our 1031 qualified intermediary guide has a checklist.

Common 1031 exchange paths in South Dakota

South Dakota exchanges tend to follow a few routes, and for a South Dakota resident the state tax result is the same in each: nothing due to South Dakota.

• South Dakota to South Dakota: trading a smaller building in Aberdeen, Watertown or Mitchell for a larger one in Sioux Falls, Brandon or Rapid City.
• Into South Dakota from neighboring states: Owners from North Dakota, Minnesota, Iowa and Nebraska can buy in the Sioux Falls or Rapid City areas. Their home-state rules, not South Dakota’s, decide what they file.
• From a clawback state: California, Massachusetts, Montana and Oregon owners exchanging into South Dakota keep their home state’s tracking and filing.
• South Dakota out of state: a resident can buy anywhere in the U.S. If the new state has an income tax, it may tax the rents and a later taxable sale.
• Into a Delaware statutory trust: owners ready to stop managing property can identify a DST interest. Our 1031 exchange DST guide covers the trade-offs.

Worked example: a $2 million South Dakota 1031 exchange

A married couple sells a 24-unit building in Sioux Falls for $2,000,000 in 2026. Selling costs are $100,000, including the $2,000 transfer fee, so the amount realized is $1,900,000. Their adjusted basis is $820,000 after $380,000 of depreciation, so the gain is $1,080,000. The $900,000 mortgage is paid at closing and the intermediary holds the remaining $1,000,000. Their other taxable income is $450,000.

Full exchange: they buy a $2,300,000 building in Rapid City with the $1,000,000 of exchange funds and a $1,300,000 loan. The price exceeds the amount realized, all cash is reinvested and the new debt exceeds the old, so all $1,080,000 of gain is deferred. That avoids about $276,040 of federal tax for 2026: $95,000 at 25% on $380,000 of unrecaptured Section 1250 gain, $140,000 at 20% on $700,000 of long-term gain, and $41,040 of net investment income tax. South Dakota income tax either way: $0.

Partial exchange: instead they take $150,000 in cash and use $850,000 of exchange funds plus a $1,450,000 loan on the same building. The larger loan does not offset cash received, so the $150,000 is boot. It is taxed first as unrecaptured Section 1250 gain at 25%, $37,500, plus $5,700 of net investment income tax, for $43,200. The other $930,000 of gain stays deferred, and their basis in the new building is $1,370,000.

• The 1031 exchange calculator runs these steps with your numbers.
• A Minnesota or North Dakota resident doing the same exchange would also defer that state’s tax on the gain, and owe it on boot.

Property tax on a South Dakota replacement property

If your replacement is in South Dakota, budget property tax on the price you pay. Non-agricultural property is assessed at market value every year and taxed on 85% of value, and an apartment building pays the other-class levy, which carries a higher school levy than owner-occupied homes. In the Minnehaha County part of Sioux Falls the other-class total was $17.960 per $1,000 of taxable value for taxes payable in 2024, about 1.53% of market value. Our guide to the property tax rate in South Dakota has city figures and a worked example.

South Dakota timeline tips

Both clocks start on the day your sale closes, so your buyer’s timing sets your deadlines. Sign the exchange agreement and assign the sale contract to the intermediary before closing; you cannot start an exchange after the money reaches you.

When the IRS announces disaster relief for South Dakota counties after a storm or flood, it can postpone the 45-day and 180-day deadlines for affected taxpayers under Revenue Procedure 2018-58. Read the notice for your county instead of assuming relief applies.

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