1031 Exchanges and DSTs in New Jersey and New York: A 2026 Guide for Real Estate Investors

Selling a rental property in New Jersey or New York after years of appreciation can mean a tax bill that takes a quarter or more of your profit. A 1031 exchange lets you defer that tax by reinvesting in other real estate. A Delaware Statutory Trust (DST) is one way to do that without taking on another property to manage.

Both work at the federal level and in both states, but the details at closing differ between New Jersey and New York, and the deadlines leave no room for error. This guide covers what you need to know before you sign a contract.

What a 1031 exchange does

Section 1031 of the Internal Revenue Code lets you sell real property held for investment or business use and buy other such property without paying tax on the gain now. The gain isn't forgiven. It carries over into the new property through its basis, and you pay it when you eventually sell in a taxable sale.

The tax you defer includes:

• Federal capital gains tax, up to 20%
• Depreciation recapture (unrecaptured Section 1250 gain), taxed at up to 25%
• The 3.8% net investment income tax
• State income tax: New Jersey's top rate is 10.75% and New York's is 10.9%, plus up to 3.876% for New York City residents

An example

A Morris County couple sells a rental house they bought in 2012 for $500,000. They sell it for $1,200,000 and pay $72,000 in commissions and transfer fees. They've claimed $180,000 of depreciation, so their adjusted basis is $320,000.

With a properly structured 1031 exchange, all of that stays invested. (Figures are illustrative; your actual tax depends on your other income and filing status.)

The rules that make or break an exchange

Only real property qualifies. Since 2018, 1031 applies only to real estate. Equipment and other personal property no longer qualify. Your home and property held mainly for resale (fix-and-flip inventory) don't qualify either.

Like-kind is broad. Any investment or business real estate can be exchanged for any other: a rental house for an apartment building, raw land for a warehouse, a New Jersey duplex for property in Florida.

Two deadlines, no extensions.

• Day 45: identify replacement property in writing, delivered to your qualified intermediary.
• Day 180: close on the replacement property. If your tax return is due before day 180, the deadline is the return due date, so file an extension when a sale late in the year would otherwise cut the window short.

Weekends and holidays don't extend either deadline. (Only federally declared disasters can postpone them.)

Identification limits. You can identify up to three properties of any value, or more than three as long as their total value doesn't exceed 200% of what you sold. If you exceed both limits, you must acquire at least 95% of the value of everything you identified.

Never touch the money. The sale proceeds must go to a qualified intermediary (QI), who holds them and uses them to buy the replacement. If the cash reaches you, or your attorney or agent acting for you, the exchange fails. Choose the QI before closing; it can't be arranged afterward.

Same taxpayer. The person or entity that sells must be the one that buys. If an LLC with two members owns the property, the LLC has to do the exchange. Splitting partners apart (one wants to exchange, the other wants cash) needs planning months before the sale.

Boot: what makes part of it taxable

To defer all of the gain, you generally need to:

1. Buy replacement property worth at least the net sale price, and
2. Reinvest all of the net cash from the sale, and
3. Replace the debt you paid off, with new debt or with additional cash.

Anything short of that is boot and is taxable, starting with depreciation recapture. Cash you keep, a smaller mortgage you don't replace, and some closing costs paid from exchange funds can all create boot.

New Jersey: what happens at closing

New Jersey follows the federal 1031 rules for income tax. The issues are at the closing table.

Nonresident sellers (the "exit tax"). When a nonresident sells New Jersey real estate, the state normally collects an estimated income tax payment at closing on Form GIT/REP-1: generally 2% of the sale price. It isn't an extra tax; it's a prepayment credited on the New Jersey nonresident return. A seller doing a 1031 exchange claims an exemption on Form GIT/REP-3 instead. If part of the exchange is taxable (you receive boot), the estimated payment is 2% of the boot. In a deferred exchange, the qualified intermediary handles the payment on any boot when the exchange is completed, and if the exchange fails, the 2% is due on the full sale price.

New Jersey residents certify their residency on GIT/REP-3 and owe no payment at closing either way.

Transfer taxes aren't deferred. A 1031 defers income tax only. The seller still pays New Jersey's realty transfer fee. Since July 2025, the "mansion tax" on sales of $1 million or more has also shifted from the buyer to the seller, at 1% up to $2 million and graduated rates up to 3.5% on sales over $3.5 million. Transfer taxes reduce your gain and can generally be paid from the exchange proceeds.

Moving out of state. New Jersey doesn't track deferred gain when you exchange New Jersey property for property in another state. When you eventually sell the replacement property, the gain is taxed by the state where you live then (and possibly the state where the property is).

New York: what happens at closing

New York follows the federal treatment as well, and so does New York City's personal income tax.

Nonresident sellers. A nonresident selling New York property files Form IT-2663 with the county recording officer at closing and pays estimated tax on the gain. For a 1031 exchange, the form reports the transaction as a like-kind exchange, and estimated tax is due only on any gain you must recognize, such as boot. The form is still required even when nothing is owed.

Transfer taxes. The seller pays New York State transfer tax of 0.4% (0.65% on certain high-value New York City sales). In New York City, the seller also pays the city's real property transfer tax, up to 1.425% on residential and 2.625% on commercial sales over $500,000. Buyers of residential property for $1 million or more pay New York's mansion tax. As in New Jersey, none of these is deferred by a 1031.

Living in New Jersey, owning in New York (or the reverse). New York taxes nonresidents on gain from New York real estate, and your home state gives a credit for that tax. In an exchange, both states defer. When you finally sell, both may be involved again. See our guide to New Jersey and New York multi-state taxes.

Where a DST fits

A Delaware Statutory Trust owns one or more large, professionally managed properties, such as apartment complexes, medical offices, warehouses and retail centers. Investors buy beneficial interests in the trust. Under Revenue Ruling 2004-86, a properly structured DST interest is treated as a direct interest in the underlying real estate, so it qualifies as replacement property in a 1031 exchange.

Why investors use DSTs

• They're done being landlords. No tenants, repairs or late-night calls. The sponsor manages the property.
• They need to meet a deadline. DST interests can close in days, which makes them a useful backup identification if your main replacement property falls through before day 180.
• They need to fill a gap. If your replacement property costs less than you sold for, putting the rest of the proceeds into a DST can avoid boot.
• They need to replace debt. Most DSTs carry nonrecourse financing at the trust level, and your share of it counts toward replacing the mortgage you paid off.
• They want to diversify across property types and states instead of putting everything into one building.
• Estate planning. DST interests can be divided among heirs more easily than a single building.

Back to the example

Our Morris County couple has $728,000 of cash after paying off their $400,000 mortgage. To defer everything, they need replacement property worth at least $1,128,000, with all $728,000 reinvested and at least $400,000 of new debt (or extra cash).

They buy a $700,000 rental with $300,000 down and a $400,000 mortgage, which replaces the debt. That uses $300,000 of their cash. The remaining $428,000 goes into a DST. Everything is reinvested, the total replacement value exceeds $1,128,000, and the full $808,000 gain stays deferred.

The trade-offs

A DST's tax benefits come from rules that also limit it. Under Revenue Ruling 2004-86, the trustee can't accept new capital once the offering closes, can't renegotiate leases or refinance, and can't reinvest sale proceeds. That keeps the tax treatment safe, but it means:

• You have no control. You can't decide when the property is sold, how it's managed or whether to refinance.
• Your money is tied up. Typical holding periods are 5 to 10 years, and there's generally no way to sell your interest early.
• Fees are significant. Sponsor, selling and management fees reduce your return.
• They're securities. DSTs are generally offered only to accredited investors through broker-dealers. Read the offering documents with your financial advisor.
• There can be state filings where the properties are. Because you're treated as owning the real estate, your share of a DST's income can require nonresident tax returns in the states where its properties sit. A DST with properties in four states can mean four extra state returns each year, which can wipe out some of the benefit of a smaller investment.
• Watch the exit. When the DST sells, you can do another 1031 exchange or pay the tax. Some DSTs are designed to roll into a REIT's operating partnership through a Section 721 exchange. That also defers the gain, but operating partnership units aren't real property, so you can't do a 1031 exchange from them later.

We don't sell DSTs or recommend any particular sponsor or offering. Our role is the tax side: whether a DST fits your exchange, how it affects your returns, and what you'll file each year.

Other situations worth knowing

Vacation homes. A second home can qualify if it's really held for investment. The IRS safe harbor (Revenue Procedure 2008-16) requires that you own it for 24 months before and after the exchange, rent it at fair rental value for at least 14 days in each of those years, and limit your personal use to the greater of 14 days or 10% of rental days.

Moving into the replacement property. You can eventually convert a replacement rental into your home, but you must own it for five years after the exchange before the home-sale exclusion can apply (IRC Section 121(d)(10)).

Buying before you sell. A reverse exchange lets you buy the replacement first, with an exchange accommodation titleholder holding title until your sale closes (Revenue Procedure 2000-37). An improvement exchange lets exchange funds pay for construction on the replacement property. Both are more complex and more expensive, and both still run on the 45/180-day clock.

Related parties. Exchanges with family members or related entities generally require both sides to keep their properties for two years.

Depreciation starts over, partly. The replacement property takes over the old basis and depreciation schedule, and any extra amount you invest is depreciated as new property. A cost segregation study on the replacement can accelerate deductions, though in an exchange the carried-over basis often limits how much can be reclassified.

The long game. If you keep exchanging until death, your heirs generally receive the property with a basis stepped up to its value at that time, and the deferred gain is never taxed. New Jersey has no estate tax, but heirs other than spouses, children, grandchildren and parents may owe New Jersey inheritance tax.

Reporting the exchange

The exchange is reported on Form 8824 with your federal return for the year of the sale, and the same deferral flows to your New Jersey or New York return. Keep the qualified intermediary (QI) agreement, identification letter, closing statements for both properties and the exchange accounting for as long as you own the replacement property and for several years after. You'll need them to compute your basis when you eventually sell.

Before you list the property

A 1031 exchange can't be fixed after closing. Talk to your CPA before you sign a contract, so you can:

1. Confirm the property and the owner qualify, and plan around any partners who want cash.
2. Estimate the tax you're deferring, to see whether an exchange is worth the cost and constraints.
3. Choose a qualified intermediary and get the exchange language into the contract.
4. Plan the replacement, including a backup such as a DST, before day 45.
5. Handle the GIT/REP or IT-2663 forms with your closing attorney.

Darian Accounting works with real estate investors across New Jersey and New York on exchanges, rental returns and depreciation. Schedule a consultation, or learn more about our 1031 exchange planning and real estate accounting.

Frequently asked questions