What does a 1031 exchange actually defer?
Federal capital gains tax and depreciation recapture on the sale of investment or business real estate, provided you reinvest through a qualifying like-kind exchange.
The federal exposure is the whole reason to do this. Long-term capital gains rates, the 3.8% net investment income tax, and depreciation recapture at up to 25% combine into a burden that can exceed 28% of the gain on a property you've held and depreciated for years.
As McLane Middleton, a New Hampshire law firm, puts it: while New Hampshire does not impose a state-level tax on capital gains from the sale of real estate, capital gains tax will still be imposed at the federal level.
That's worth stating plainly because a lot of 1031 marketing implies a combined federal and state saving. In New Hampshire there's no state layer to save.
Does New Hampshire's lack of an income tax make 1031s less useful?
It makes the arithmetic simpler and removes one real risk that investors in other states carry.
Several high-tax states operate clawback statutes, tracking deferred gain on property sold within their borders and taxing it later even if you exchange into property elsewhere. New Hampshire has nothing to claw back, because it never taxed the gain in the first place. If you sell a Manchester triple-decker and exchange into property in another state, there's no New Hampshire tail following the transaction.
The federal benefit remains substantial and is the reason most New Hampshire investors do this at all.
One wrinkle for entity owners: New Hampshire's Business Profits Tax under RSA 77-A reaches business income and uses federal taxable income as its starting point. If you hold property through an entity, the interaction is worth confirming with a CPA rather than assuming the exchange is clean.
What about the New Hampshire Real Estate Transfer Tax?
It applies, and a 1031 exchange does not automatically waive it.
The Real Estate Transfer Tax under RSA 78-B is due at recording, and in a 1031 you're recording two transactions rather than one. It's a transaction cost rather than an income tax, so the deferral machinery of a 1031 doesn't touch it.
This is the item most commonly missed in generic 1031 content, which tends to be written for high-income-tax states where transfer taxes are a rounding error next to the state capital gains bill. In New Hampshire the relationship is inverted. Build it into your numbers alongside recording fees at the county registry.
Working against a 45-day clock? Send me the parameters and I'll run comps and cash flow on candidate replacement properties. Two business days, no obligation.
How do the deadlines actually work?
Both run from the day your relinquished property closes, and they run at the same time rather than one after the other.
45 days to identify. Written identification of candidate replacement properties, delivered to your qualified intermediary. Federal rules give you a few ways to structure the list, commonly described as the three-property rule, the 200% rule, and the 95% rule.
180 days to close, or your federal tax return due date for that year including extensions, whichever comes first. That second clause catches people who sell late in the year. If your relinquished property closes in November, your 180 days may effectively be cut short by the April filing deadline unless you extend.
Missing the 45-day window ends the exchange and makes the full gain taxable in the year of sale. These deadlines are effectively immovable.
What is boot, and how do people trigger it accidentally?
Boot is any non-qualifying value you receive in the exchange, and it's taxable immediately even if the rest of the exchange holds.
The two common sources:
Cash. Any sale proceeds you don't reinvest. If you sell for $700,000 and buy for $650,000, that $50,000 is boot.
Debt relief. If your replacement property carries less debt than the property you sold, the reduction counts as boot. This surprises people who sell a leveraged building and buy a cheaper one with cash.
Full deferral generally requires replacement property value and debt at or above what you gave up. Structure the financing with that in mind before you start, since it's difficult to fix in the middle.
What's the process in practice?
- Engage a qualified intermediary before you close on the property you're selling. This is not something you can arrange afterward, because once you've received the proceeds the exchange is disqualified.
- Execute the exchange agreement and direct all proceeds to the QI.
- Close the sale. Your 45-day and 180-day clocks both start here.
- Identify candidates in writing within 45 days, following the federal identification rules.
- Line up financing, inspections, and title work early. The 180-day window disappears quickly when you're also arranging a loan.
- Close on the replacement property by the earlier of day 180 or your return due date.
- Budget for the Real Estate Transfer Tax and recording costs at the county registry.
- Report on IRS Form 8824 with your return, and keep complete records.
The finding-a-replacement-property step is where most exchanges get tight. A 45-day identification window in a market where New Hampshire has not seen a balanced market since October 2016 is a genuine constraint, and it's worth having candidates in view before you list the property you're selling.
Should I do one?
That's a question for your CPA, and the answer depends on your basis, your holding period, your depreciation history, and what you plan to do next.
Two situations where investors commonly decide against it: when the gain is small enough that the transaction costs and the compressed timeline outweigh the deferral, and when the replacement property they can actually find inside 45 days is worse than the one they're selling. A deferred tax bill on a property you didn't want is a poor trade.
I'm a licensed real estate agent and not a CPA or a tax attorney. What I can do is help you find and underwrite replacement property fast enough to matter.
