A 1031 exchange in Virginia lets you sell investment or business real estate and roll the proceeds into another investment property without paying federal or Virginia capital gains tax on the sale, as long as you follow the federal timing rules and use a qualified intermediary. Virginia conforms to the Internal Revenue Code on a fixed-date basis under Virginia Code 58.1-301, so Section 1031 deferral flows automatically to your state return.1Virginia Code Commission. Virginia Code 58.1-301 – Conformity to Internal Revenue Code The current conformity date is December 31, 2025.2Virginia Tax. Tax Bulletin 26-1 Conformity
Virginia taxes capital gains as ordinary income at rates up to 5.75%, so the state-level deferral is meaningful on its own. One thing the exchange does not shield: Virginia’s grantor’s tax of $1 per $1,000 of sale price still applies to the deed transfer.3Virginia Code Commission. Virginia Code 58.1-802 – Additional Tax Paid by Grantor
The Two Deadlines That Decide Everything
Every delayed 1031 exchange runs on two hard clocks, and both start the day you close on the sale of the property you’re giving up.
- 45 calendar days to formally identify potential replacement properties in writing. The identification must be signed and delivered to a party in the exchange, usually the qualified intermediary.
- 180 calendar days to close on the replacement property, or by the due date of your federal return for the year of sale (including extensions), whichever comes first.
That second cutoff catches people. Sell in October and your return is due the following April 15, which chops the 180-day window short unless you file a federal extension. Filing a six-month extension is standard practice when you’re mid-exchange at year end.4Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
Weekends and holidays count. There are no extensions for administrative delays, title problems, or financing hiccups. Miss either deadline and the exchange fails entirely, turning the original sale into a fully taxable event.
How to Identify Replacement Properties
Within the 45-day window you generally pick one of three identification methods:5Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
- Three-Property Rule: up to three properties of any value.
- 200% Rule: more than three properties, so long as their combined fair market value doesn’t exceed 200% of what you sold.
- 95% Rule: any number of properties at any value, but you must actually acquire at least 95% of the aggregate identified value.
Most investors use the Three-Property Rule because it leaves the most room if a deal collapses.
What Qualifies as Like-Kind in Virginia
Since the Tax Cuts and Jobs Act, 1031 exchanges are limited to real property held for investment or productive use in a trade or business.6Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips Personal residences don’t qualify. Inventory, such as a house you flipped, doesn’t qualify. Equipment, vehicles, and other personal property no longer qualify at all.5Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
The “like-kind” label is broader than most people assume. It refers to the nature of the property rather than its grade or quality. You can exchange a Richmond apartment building for Shenandoah Valley farmland, or trade a retail strip center for an industrial warehouse. Everything inside the category of investment or business real estate counts as like-kind to everything else in that category.
You Must Use a Qualified Intermediary
You cannot touch the sale proceeds at any point. If the money passes through your hands, or into an account you control, the IRS calls it constructive receipt and the exchange dies on the spot. A qualified intermediary holds the funds between closings and uses them to acquire the replacement property on your behalf.7eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
Certain people are disqualified from serving as your intermediary: your attorney, accountant, real estate agent, employee, or anyone who has acted in those roles for you within the two years before the exchange. Family members are out as well.
Virginia does not license or regulate qualified intermediaries at the state level, so vetting the company is on you. Look for an intermediary that holds exchange funds in segregated, FDIC-insured accounts and carries fidelity bond or errors-and-omissions coverage. Fees for a standard delayed exchange typically run between $600 and $1,200.
When You Still Owe Tax: Boot
The exchange defers your full gain only if you reinvest all the proceeds and take on debt equal to or greater than what you paid off. Any shortfall is called boot and is taxable in the year of the exchange.4Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
- Cash boot: if the replacement property costs less than the sale price, the leftover cash sitting with the intermediary is taxable.
- Mortgage boot: if the mortgage on the replacement is smaller than the mortgage you paid off, the debt relief is taxable.
You can offset mortgage boot by bringing extra cash to the replacement closing. Sell a property with a $400,000 mortgage and buy one with a $300,000 mortgage, and you’d need to add $100,000 of your own money at closing to avoid $100,000 of taxable boot. The arithmetic is simple, but it fails investors who don’t map the debt structure before shopping for the replacement.
Nonresident Sellers and Form R-5E
If you own Virginia investment property but live out of state, the settlement agent is required to withhold a portion of your sale proceeds for Virginia income tax. Nonresident sellers doing a 1031 exchange can claim an exemption by filing Virginia Form R-5E, the Nonresident Real Property Owner Exemption Certificate, with the Virginia Department of Taxation.8Virginia Department of Taxation. Nonresident Real Property Owner Exemption Certificate
Timing is everything. The completed Form R-5E needs to be in the settlement agent’s hands before closing. If it isn’t filed on time, the agent will withhold from your proceeds, and those withheld dollars won’t be available to reinvest. That shortfall can create taxable boot or, in a tight deal, leave you unable to close on the replacement at all. Coordinate with your qualified intermediary and settlement agent weeks ahead of the sale so the exemption is in place when the deed is signed.
Virginia residents don’t deal with withholding, but the federal and state reporting rules below still apply.
Vacation and Second Home Property
Vacation homes sit in a gray area. A property used purely for personal enjoyment doesn’t qualify, but one you rent out most of the year can. Revenue Procedure 2008-16 sets out a safe harbor:9Internal Revenue Service. Revenue Procedure 2008-16
- Own the property for at least 24 months before the sale (for the relinquished property) or 24 months after the purchase (for the replacement).
- Rent it at fair market value for at least 14 days in each of the two 12-month qualifying periods.
- Keep personal use below the greater of 14 days or 10% of the days it was rented at fair market value during each 12-month period.
A cabin near Virginia Beach rented 200 days a year and used personally for 12 fits the safe harbor. One rented 30 days and used 60 doesn’t. The safe harbor isn’t the only way to qualify a vacation property, but it’s the cleanest, and stepping outside it invites scrutiny on audit.
Reporting the Exchange
A properly completed exchange produces no immediate tax bill, but you still have to report it. File federal Form 8824 for each exchange completed during the tax year. The form captures descriptions and dates for both properties, the values exchanged, any boot received, and the basis calculations.10Internal Revenue Service. Instructions for Form 8824
Because Virginia conforms to the IRC, the state has no separate exchange form; the Form 8824 figures flow through to your Virginia return.1Virginia Code Commission. Virginia Code 58.1-301 – Conformity to Internal Revenue Code Nonresidents who filed Form R-5E should make sure the return matches the exemption they claimed. Skipping the reporting, even when zero tax is due, can trigger audit inquiries, penalties, and interest. Any competent qualified intermediary will give you the closing statements you need to complete the form.