Does Virginia recognize 1031 exchanges?
Yes. A Virginia 1031 exchange is treated the same way as a federal one, because Virginia income tax starts from federal adjusted gross income and follows the Internal Revenue Code. House Bill 29 (2026 Acts of Assembly, chapter 7), enacted February 20, 2026, fixed Virginia’s conformity date at December 31, 2025, according to Virginia Tax Bulletin 26-1. The bulletin lists the federal provisions Virginia decoupled from, and like-kind exchanges are not among them.
Deferral in Virginia is worth close to the full top rate. The 5.75% bracket starts at $17,000 of taxable income, so almost all of a large gain is taxed at 5.75%. On a $1.2 million gain, that is about $69,000 of state tax an exchange can push into the future.
Federal 1031 rules that apply in Virginia
Virginia adds no deadlines of its own, so the federal timeline controls. You have 45 days from the sale to identify replacement property in writing and 180 days, or your return due date if earlier, to close on it. 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.
To defer all the gain, buy a replacement of equal or greater value and reinvest all the net cash. Cash you keep or debt relief you do not replace is boot, taxed by both the IRS and Virginia in the year of the exchange. Our guide to 1031 exchange rules sets out the identification tests and boot rules, and the complete 1031 exchange guide covers the process from start to finish.
Two federal rules trip up owners in family and entity deals. An exchange with a related person, such as a sibling or an entity you control, can be undone if either side disposes of its property within two years under Section 1031(f). And the property you sell and the one you buy should be held in the same taxpayer’s name, so an LLC that sells should be the LLC that buys, unless your advisers plan a change well ahead of the sale.
Virginia depreciation records and your exchange
Virginia does not follow federal bonus depreciation, and Tax Bulletin 26-1 says owners must keep separate Virginia depreciation records as if the federally decoupled deductions never happened. Those records carry into an exchange.
When you exchange, your basis in the replacement is built from your basis in the old property, and Virginia basis and federal basis can differ. If you took bonus depreciation federally after a cost segregation study, your Virginia basis is usually higher. Ask your preparer to roll both schedules forward into the replacement, so the Virginia gain is right when you eventually sell.
Nonresident sellers: registration instead of withholding
Virginia does not withhold tax at closing when a nonresident sells. Instead, Virginia Tax requires the real estate reporting person, usually the settlement agent, to collect a registration form from each nonresident seller. Individuals use Form R-5; partnerships, S corporations, estates and trusts use Form R-5P. The agent files it by the 15th of the month after closing, and completes it for the seller if the seller does not.
An exchange does not by itself remove the registration step. Virginia Tax says sales not subject to Virginia income tax are exempt, and a seller whose sale is exempt from both federal and state tax gives the reporting person a Form R-5E exemption certificate. Ask your settlement agent and intermediary whether R-5E fits your exchange, and remember that a nonresident who takes boot owes Virginia tax on it and should file a Virginia nonresident return.
- Tell the settlement agent at the start that the sale is part of an exchange, and give them the intermediary’s details.
- Nonresident individuals: complete Form R-5 at closing, or Form R-5E if it applies.
- Nonresident entities: use Form R-5P with the owner details the form asks for.
- File a Virginia nonresident return for any boot you receive.
Does Virginia have a 1031 clawback?
No. Virginia is not one of the four states with a clawback or tracking rule. Those are California, Massachusetts, Montana and Oregon. A Virginia owner who trades a Norfolk building for one in Raleigh files nothing extra with Virginia each year to track the deferred gain.
Residency still matters later. If you stay a Virginia resident and sell the North Carolina replacement in a taxable sale, Virginia taxes the gain as a resident, and Section 58.1-332 may give a credit for North Carolina tax, subject to its limits. If you have moved out of Virginia by then, a gain on out-of-state property is generally outside Virginia’s reach.
Does Virginia regulate qualified intermediaries?
Yes. Virginia is one of nine states with a law regulating exchange intermediaries, along with California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon and Washington. Virginia’s law is the Exchange Facilitators Act, Sections 55.1-800 through 55.1-806 of the Code of Virginia.
The Act applies to anyone who, for a fee, acts as a qualified intermediary or exchange accommodation titleholder for Virginia property, or who has a Virginia office soliciting that business. Banks, title insurers and escrow companies that act only as depositories or as a qualified escrow holder or trustee are excluded.
- Errors and omissions insurance of at least $250,000, or $250,000 in cash or irrevocable letters of credit, at all times.
- Exchange funds held in a separately identified account that needs the client’s written authorization to withdraw, or in a qualified escrow or qualified trust.
- No commingling with operating funds and no loans or transfers to affiliates, with narrow exceptions.
- Notice to clients within 10 business days of a change in control, plus a website notice for at least 90 days.
- Civil penalties of up to $2,500 per willful violation, plus investigation costs and attorney fees.
Choosing an intermediary for a Virginia exchange
The Act sets a minimum, and it is low. $250,000 of coverage is small next to the $1 million or more an intermediary may hold for one apartment sale, so ask for the actual coverage amounts, any fidelity bond, and how your funds will be held. A separate account that needs your written sign-off is the stronger choice.
Your intermediary also cannot be someone who acted as your agent in the past two years, such as your attorney, CPA, employee or real estate broker. Our guide to choosing a 1031 qualified intermediary covers fees, contract terms and what to check.
Common 1031 exchange paths for Virginia owners
Most Virginia exchanges follow one of a few paths, and the choice affects your state filings for years.
Virginia to Virginia keeps everything simple. An owner might trade small buildings in Arlington for a larger property in Richmond or Hampton Roads, where effective property tax rates and prices can differ a lot.
Virginia to another state is common for owners chasing lower prices or taxes, often North Carolina, Tennessee or the Southeast. It adds no Virginia tracking filing, but the new state taxes the gain when you sell there, and a nonresident seller registers on Form R-5 at the Virginia closing.
Out-of-state into Virginia carries no Virginia clawback. An owner coming from a tracking state such as California or Oregon may still owe filings to that state. A Delaware statutory trust is another option for owners who want to stop managing property.
Worked example: a Virginia exchange into North Carolina
A Virginia Beach resident sells an 18-unit building in Norfolk for $2,200,000. Selling costs are $88,000, so the amount realized is $2,112,000. With an adjusted basis of $700,000, the gain is $1,412,000. The $800,000 loan is paid off, leaving $1,312,000 of net proceeds. The owner takes $112,000 in cash at closing, and the intermediary receives $1,200,000.
The owner buys a $2,400,000 building in Raleigh with the $1,200,000 of exchange funds and a new $1,200,000 loan. The $112,000 is boot, so $112,000 of gain is recognized and $1,300,000 is deferred. At Virginia’s 5.75% rate, the state tax on the boot is $6,440, and the Virginia tax deferred is $74,750. Federal tax on the boot is owed too.
Because Virginia has no clawback, the owner files no annual tracking form. If the owner is still a Virginia resident when the Raleigh building is sold in a taxable sale, Virginia taxes the gain then. Had the owner sent the full $1,312,000 to the intermediary, the entire $1,412,000 would be deferred and the Virginia tax deferred would be about $81,190.
| Item | Amount |
|---|---|
| Sale price | $2,200,000 |
| Total gain | $1,412,000 |
| Cash boot taken | $112,000 |
| Gain deferred | $1,300,000 |
| Virginia tax on boot (5.75%) | $6,440 |
| Virginia tax deferred (5.75%) | $74,750 |
Selling a Virginia apartment building as part of an exchange
Skyline buys apartment buildings with five or more units in Virginia. 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 gives you time to find a replacement before your 45 days start.
For the tax you would owe without an exchange, see Virginia capital gains tax on real estate. The 1031 exchange calculator runs the federal side for your own numbers.
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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