Conformity and Nonconformity

For most States the answer is yes, and it follows mechanically from how the State computes income. The exceptions are where transactions go wrong, and the rules have moved recently enough that commonly repeated summaries are out of date.

57.1 How a State reaches a like-kind exchange

Most States that tax income begin the computation with a federal figure, either federal adjusted gross income or federal taxable income, and then make State additions and subtractions. Where that is the method, a gain that federal law defers never enters the State computation unless the State adds it back.

Two further questions determine the result.

Which version of the Code the State follows. Some States follow the Code as amended from time to time. Others adopt the Code as of a fixed date and update by legislation. California, for example, generally conforms to the Internal Revenue Code as of January 1, 2015, and it has repeatedly declined to adopt federal changes in full.¹ A State on a fixed date may not reflect the 2017 limitation of section 1031 to real property unless it enacted that change separately.

Whether the State has a provision of its own. Some States add exchange-specific rules: an income threshold, a sourcing rule, or a reporting requirement that continues after the exchange. Those are the subject of the rest of this chapter and of Chapter 58.

Three States must be identified for every exchange. The State where the relinquished property is located. The State where the replacement property is located. And the State where the taxpayer resides, both at the time of the exchange and, as far as can be predicted, at the time of the eventual disposition. Each can assert a claim, and the claims do not coordinate with each other.

57.2 Maryland

Maryland begins with federal adjusted gross income. The Comptroller states the consequence for exchanges directly: because the determination of Maryland adjusted gross income begins with federal adjusted gross income, if the gain from a transaction is not included in federal adjusted gross income, it is not included in Maryland adjusted gross income.² The same bulletin notes that deferral under section 1031 has been limited to real property since the 2018 tax year.³

Deferred gain therefore stays out of the Maryland computation, and recognized boot comes in with it.

A 2025 change applies to recognized gain. Maryland now imposes an additional two percent tax on net capital gain included in Maryland adjusted gross income, for individuals whose federal adjusted gross income exceeds $350,000, regardless of filing status.⁴ The tax also applies to a fiduciary with federal taxable income over $350,000 on undistributed capital gain, and to capital gain an individual over the threshold receives from a fiduciary or a pass-through entity. It does not apply to corporations.⁵

Capital gain from certain assets is excepted. The exceptions relevant to real estate are a primary residence that is a single-family home, townhome, row home, residential condominium unit, or residential cooperative unit sold for less than $1,500,000; land that is subject to a conservation, agricultural, or forest preservation easement, or that will be subject to one on the sale; property used in a trade or business if its cost is deductible under section 179; and affordable housing owned by a nonprofit organization.⁶

Four consequences for exchanges.

Deferred gain is outside the surcharge. Because it is not in Maryland adjusted gross income, it is not net capital gain included in that figure for the year of the exchange.

Boot can carry it. Recognized gain that is capital gain federally is net capital gain for this purpose. That includes unrecaptured section 1250 gain, which is capital gain taxed federally at twenty five percent, as Chapter 37 develops. Section 1245 recapture is ordinary income and is taxed at ordinary Maryland rates rather than through the surcharge.

Boot can trigger the threshold. The threshold is measured on federal adjusted gross income, which includes the recognized boot itself. A taxpayer below $350,000 before the exchange can cross it because of the exchange.

The easement exception matters for farmland. Land under an agricultural preservation easement, or land that will be placed under one on the sale, is excepted. A Maryland farm exchange should be reviewed for that exception before the boot is modeled.

For a Maryland resident above the threshold, the stacked rate on boot in the unrecaptured section 1250 layer is now twenty five percent federal, plus the 3.8 percent net investment income tax where it applies, plus Maryland's ordinary rate, plus the two percent surcharge, plus county tax. That figure should be computed before a client decides to take cash out of an exchange.

57.3 California

California generally conforms to the Code as of a fixed date rather than as amended,⁷ and it addressed the 2017 amendments to section 1031 by separate statute.

The 2017 amendments limiting section 1031 to real property apply for California personal income tax purposes, except as the California statute otherwise provides.⁸

The income carve-out, and its repeal. As enacted in 2019, the California statute applied the real property limitation only to individuals with adjusted gross income of $500,000 or more for a head of household, surviving spouse, or joint return, or $250,000 or more for an individual return, measured for the taxable year in which the exchange began.⁹ Individuals below those amounts could continue to defer gain on exchanges of personal property for California purposes, which produced a genuine federal and State mismatch.

That subdivision does not apply for taxable years beginning on or after January 1, 2025. The statute was amended in 2025, effective October 1, 2025.¹⁰ For taxable years beginning on or after that date, the real property limitation applies to California taxpayers without regard to income.

Many practitioner summaries still describe the income carve-out as current law. It is not, and an advisor relying on one of them for a 2025 or later exchange of personal property by a California individual will reach the wrong answer.

Effective dates. The California provision applies to exchanges completed after January 10, 2019, and does not apply where the relinquished property was disposed of, or the replacement property received, on or before that date.¹¹

57.4 Pennsylvania

Pennsylvania was the leading example of nonconformity until recently, and the change leaves a residue that still matters.

Pennsylvania taxes net gains or income from the disposition of property as a class of income, and that class includes gain from the exchange of property.¹² Before the 2023 tax year, Pennsylvania personal income tax law contained no provision analogous to section 1031, so section 1031 could not be used to defer gain for Pennsylvania purposes.¹³

Act 53 of 2022 incorporated the requirements of section 1031 into the Pennsylvania personal income tax, for exchanges occurring in tax years beginning after December 31, 2022.¹⁴ Pennsylvania gain is now deferred where the gain is deferred for the same exchange under section 1031. The taxpayer's Pennsylvania basis in the relinquished property becomes the basis in the replacement property, and the taxpayer must continue to use the same depreciation convention and useful life for the replacement property as for the relinquished property.¹⁵

The residue. An exchange completed before the change was taxable for Pennsylvania purposes when the federal gain was deferred. A replacement property from such an exchange may therefore carry a Pennsylvania basis that differs from its federal basis, and the two should be tracked separately. A Pennsylvania client who exchanged before 2023, and who now proposes a later exchange or a sale, should not be advised on the assumption that federal and State basis are the same.

57.5 Running the State analysis

A short procedure covers most transactions.

Name the States. Relinquished property, replacement property, and residence at the exchange and at the expected disposition.

For each State, answer four questions. Does it start from a federal figure? Does it follow the current Code or a fixed date? Does it have an exchange-specific rule, including an income threshold or a basis rule? Does it assert a claim on deferred gain after the property or the taxpayer leaves, as Chapter 58 describes?

Model the recognized gain at State rates. For a Maryland resident, include the two percent surcharge where federal adjusted gross income, including the boot, exceeds $350,000, and check the exceptions in 57.2.

Then turn to the transaction taxes. Nonresident withholding at closing is the subject of Chapter 59, and transfer and recordation taxes are the subject of Chapter 60. Both are imposed whether or not the exchange defers income tax, and both can reduce the cash available to buy replacement property.