How Does a 1031 Exchange Work in South Carolina?

A 1031 exchange in South Carolina works the same way it does federally: you sell investment real estate, roll the proceeds into a like-kind replacement property through a qualified intermediary, and defer capital gains tax at both the federal and state level. South Carolina adopts the Internal Revenue Code wholesale under Code Section 12-6-40, so if your exchange qualifies under IRC Section 1031, it qualifies here with no separate state election.¹ The one piece unique to South Carolina is nonresident withholding paperwork at closing, which can trap your proceeds if you don’t file the right form.

How South Carolina Treats a Federal 1031 Exchange

South Carolina conforms to the IRC as amended through December 31, 2024, and provides that elections made for federal purposes automatically apply at the state level unless the state says otherwise.¹ The practical result: you won’t owe South Carolina income tax on the deferred gain in the year of the exchange. The deferred gain carries forward into your replacement property’s basis, and the state collects when you eventually sell without exchanging again. No separate state exchange form exists.

Property That Qualifies

Since the Tax Cuts and Jobs Act, Section 1031 covers real property only. Personal property like equipment, vehicles, or furniture no longer qualifies.² For real estate investors, that limit rarely bites, but you can’t fold fixtures or furnishings into the exchange the way you could before 2018.

“Like-kind” refers to the nature of the property, not its grade or use. A warehouse in Columbia is like-kind to an apartment building, raw land, a retail strip, or a single-family rental anywhere else. Both properties must be held for investment or productive use in a business.³ Primary residences don’t qualify. Property held primarily for resale, like a flip, also fails.

Both properties must sit within the United States. U.S. real estate is not like-kind to foreign real estate.² There’s no requirement that the replacement property be in South Carolina. You can sell a Charleston rental and buy in Arizona without affecting your deferral.

Delaware Statutory Trust (DST) interests qualify as replacement property under IRS Revenue Ruling 2004-86. Investors use them when they want passive, institutional-grade exposure or need to park proceeds quickly as the 45-day identification window closes.

The 45-Day and 180-Day Clocks

Two deadlines govern every exchange, and both are firm. From the day you close on the relinquished property, you have 45 days to identify replacement properties in writing and 180 days to close on the purchase.³ The 180-day window can run shorter if your tax return comes due first, so file an extension if needed to preserve the full period. Only presidentially declared disasters can extend these deadlines.

Identification follows one of three rules:

Three-property rule. You can identify up to three potential replacements regardless of value. Most exchangers use this one because it is the simplest.
200% rule. If you identify more than three properties, their combined fair market value cannot exceed 200% of the sale price of what you gave up.
95% exception. If you blow past both limits, the exchange still works, but only if you actually acquire at least 95% of the aggregate value identified. In practice this is hard to meet.

The identification must be written, signed, and delivered to the qualified intermediary or another party to the exchange (not you, and not a disqualified person). Street address or legal description is required; vague descriptions don’t count.

Avoiding a Taxable Boot

“Boot” is anything you receive in the exchange that isn’t like-kind real property. It’s taxable in the year of the exchange. The two common forms are cash boot and mortgage boot.

Cash boot arises when you don’t reinvest all the proceeds. Sell for $600,000, buy for $500,000, and the $100,000 difference is taxable. Mortgage boot arises when the debt on the replacement is lower than the debt you paid off. If your old loan was $300,000 and your new one is $200,000, that $100,000 of debt relief is boot, even if you reinvested every dollar of cash.⁴ You can offset mortgage boot by adding cash at closing. You cannot offset cash boot with additional debt.

For full deferral, two things must happen: the replacement property’s purchase price must equal or exceed the relinquished property’s sale price, and you must reinvest all the equity. Falling short on either triggers a taxable boot.

Working With a Qualified Intermediary

A qualified intermediary (QI) holds your exchange funds between the sale and the purchase. You cannot touch the money. If you have actual or constructive receipt of the proceeds at any point, the entire exchange is disqualified.⁵ The QI receives funds from the buyer at closing and uses them to acquire the replacement property on your behalf.

Federal regulations disqualify anyone who has acted as your agent within the two years before the exchange. Your current attorney, accountant, real estate broker, or investment advisor cannot serve. You need an independent exchange company. Standard forward exchange fees typically run $600 to $1,200.

One risk catches investors off guard. QI funds are generally not FDIC-insured beyond standard deposit limits, and if the intermediary goes bankrupt holding your proceeds, you could lose the money. Ask prospective QIs about bonding, insurance, and where funds are held. A QI that segregates client funds in separate accounts at a federally insured bank is safer than one that commingles them.

Nonresident Withholding: Forms I-290 and I-295

This is the South Carolina-specific trap. The state requires buyers to withhold a portion of the sale price when the seller is a nonresident. Under Section 12-8-580, the withholding rate for an individual nonresident equals South Carolina’s maximum individual income tax rate, applied to the recognized gain if the seller files an affidavit, or to the entire amount realized if no affidavit is provided. Nonresident corporations face a 5% rate.⁶ The top individual rate is being phased down under H.4216, so the exact percentage shifts each year. Check with the Department of Revenue for the current figure.

The statute explicitly excludes “tax exempt or tax deferred transactions” from withholding.⁶ A properly structured 1031 exchange qualifies. But the buyer only knows that if you hand over the right paperwork at closing.

Two forms do the work:

Form I-295, the Seller’s Affidavit. Nonresident sellers use this to claim a withholding reduction or exemption. For exchanges, the form has specific checkboxes for simultaneous exchanges where all gain is deferred, partial exchanges where some gain is recognized, and deferred exchanges using a qualified intermediary under SC Revenue Ruling #09-13. When using a QI, you must authorize the intermediary to release relevant information to the Department of Revenue.⁷
Form I-290, the Nonresident Real Estate Withholding form. The buyer or closing attorney files this to report the transaction and any withholding. If you provided a valid I-295 claiming the 1031 exemption, the I-290 reflects zero withholding on the deferred portion.⁸

Get these to your closing attorney before or at the closing table. If the paperwork isn’t in order, the buyer is legally required to withhold, and recovering the money means waiting until you file your South Carolina return. That defeats the whole point of the exchange’s liquidity. Resident sellers aren’t subject to this regime and don’t need the forms for exchange purposes.

Holding Period and Investment Intent

The IRS has never set a statutory minimum holding period. What matters is whether the property was genuinely held for investment or business use. But selling too quickly after acquiring, or exchanging soon after buying, invites scrutiny.

Most tax advisors recommend holding both properties for at least two years to establish a defensible record of investment intent. At a minimum, one year and a day aligns with long-term capital gains treatment and suggests investment rather than flipping.

For dwelling units like vacation rentals or homes converted from personal use, Revenue Procedure 2008-16 offers a safe harbor. The property must be rented at fair market value for at least 14 days during each of the two 12-month periods before the exchange (for the relinquished property) or after the exchange (for the replacement property). Personal use during each period cannot exceed the greater of 14 days or 10% of the days the property was rented. The safe harbor isn’t mandatory, but meeting it gives you bright-line protection.

Document everything: leases, rental income records, property management contracts, marketing efforts, capital improvement receipts. If you converted a primary residence into a rental, hold it as a rental for at least two years before exchanging.

Related-Party Exchanges

Exchanges between related parties (siblings, spouses, ancestors, lineal descendants, and entities where the taxpayer has significant ownership) carry an additional two-year holding requirement. If you exchange with a related party and either side disposes of the received property within two years, the deferred gain snaps back into taxable income as of that disposition date.⁹

Three exceptions apply: the rule doesn’t trigger if the disposition follows the death of either party, results from an involuntary conversion like a condemnation, or the taxpayer shows that neither the exchange nor the disposition had tax avoidance as a principal purpose.⁹ The IRS also disallows any exchange structured to circumvent the related-party rules. Aggressive planning backfires here.

Depreciation Carries Over, Too

An exchange defers depreciation recapture along with capital gains, but it doesn’t erase it. All the depreciation you claimed on the relinquished property carries over into the replacement property’s adjusted basis. The new basis is your old carryover basis, plus any added cash, minus any boot received. It is not the replacement property’s market value.

Two consequences. Your annual depreciation deductions on the replacement property will be calculated from that carryover basis, so they may be smaller than you’d expect on a freshly purchased property. And when you eventually sell without exchanging, all accumulated depreciation from every prior exchange comes due. Unrecaptured Section 1250 gain on real property is taxed at a maximum federal rate of 25%, on top of the capital gains rate on the rest of your profit. Accelerated depreciation on certain components can be taxed as ordinary income at rates up to 37%.

Each serial exchange grows the deferred depreciation balance. That is the long-term cost to weigh against the short-term deferral benefit.

South Carolina’s 44% Capital Gains Deduction

When you eventually sell investment property in South Carolina without doing another exchange, the state offers a meaningful break. Section 12-6-1150 lets individuals, estates, and trusts deduct 44% of net capital gains recognized in the state from South Carolina taxable income.¹⁰ Only the remaining 56% is subject to state income tax.

The deduction applies whether or not the gain has been deferred through prior exchanges. Combined with the state’s declining top income tax rate under H.4216, the effective South Carolina tax on real estate capital gains is lower than the headline rate suggests.¹¹ Factor this in when deciding whether another exchange is worth the cost and complexity: the state-level savings from exchanging, while real, are smaller than in states that tax capital gains at full income tax rates with no deduction.

Reverse Exchanges

Sometimes you find the right replacement before your current property has sold. A reverse exchange lets you acquire the replacement first, then sell the relinquished property afterward. Revenue Procedure 2000-37 provides a safe harbor.

An exchange accommodation titleholder (EAT), typically affiliated with your QI, takes title to either the replacement or the relinquished property while you complete the other side. The whole exchange still must wrap up within 180 days, and you must identify the relinquished property within 45 days if the EAT holds the replacement (or the reverse).¹² Reverse exchanges cost significantly more than forward exchanges because the EAT takes actual title, which brings separate financing arrangements and additional legal work. In a tight market where you can’t wait for your sale to close, they prevent you from losing a deal.

Reporting the Exchange and Budgeting the Costs

Every 1031 exchange must be reported on IRS Form 8824, filed with your federal return for the year the exchange began. The form captures descriptions of both properties, dates of transfer and identification, the relationship between parties, exchange values, and the calculation of recognized and deferred gain.¹³ Even when no tax is due, failure to file Form 8824 gives the IRS grounds to disallow the deferral.

On the South Carolina side, the deferred gain flows through automatically because the state conforms to the IRC.¹ There is no separate state exchange form beyond the withholding documents.

Costs to budget beyond the normal purchase and sale closing expenses: QI fees of roughly $600 to $1,200 for a standard forward exchange, higher for a reverse. South Carolina charges a deed recording fee of $1.30 per $500 of property value on each transfer, so a $500,000 property adds about $1,300 per side.¹⁴ You’ll also pay title insurance, attorney fees (South Carolina is an attorney-closing state), and any lender charges on the replacement property.

These costs cannot be paid from the exchange proceeds without creating a taxable boot. Any money diverted from QI-held funds for ineligible expenses reduces the amount reinvested and can trigger a partial tax bill. Work with your intermediary and closing attorney to ensure only qualifying closing costs come out of the exchange funds.

1
South Carolina Legislature. South Carolina Code 12-6-40 – Application of Federal Internal Revenue Code to State Tax Laws
2
Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
3
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
4
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
5
Internal Revenue Service. Sales Trades Exchanges 2
6
South Carolina Legislature. South Carolina Code 12-8-580 – Withholding by Purchasers of Real Property From Nonresidents
7
South Carolina Department of Revenue. Form I-295 – Sellers Affidavit Nonresident Seller Withholding
8
South Carolina Department of Revenue. Form I-290 – Nonresident Real Estate Withholding
9
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
10
South Carolina Legislature. South Carolina Code 12-6-1150 – Net Capital Gain Deduction
11
South Carolina Department of Revenue. Information About H 4216
12
Internal Revenue Service. Revenue Procedure 2000-37
13
Internal Revenue Service. Instructions for Form 8824
14
South Carolina Legislature. South Carolina Code Title 12 Chapter 24 – Deed Recording Fee