1031 Exchange in Connecticut: Conveyance Tax Tiers, 6.99% Top Rate and DSTs

Connecticut's conveyance tax is due at recording whether you sell or exchange

Every Connecticut deed for consideration of $2,000 or more goes to the town clerk with form OP-236, the Real Estate Conveyance Tax Return, and the grantor pays the tax before the deed is recorded. Section 12-498 of the General Statutes lists the exempt transactions, from transfers to the state to homes with deteriorated foundations, and a like-kind exchange is not among them.

So an exchanging seller pays the same conveyance tax as a cash seller, and the intermediary's involvement changes neither the form nor the payer. The Office of Legislative Research puts the combined state and municipal rate between 1% and 2.75% of the sales price depending on property type and town.

Budget the tax as a closing cost paid from proceeds; it reduces the cash your qualified intermediary holds, and therefore the amount you must reinvest to keep the exchange fully deferred.

Which conveyance tier applies: commercial, apartment building or single-family rental

The state rate depends on what the building is, not on who owns it. Under section 12-494, nonresidential property other than unimproved land is taxed at 1.25%, while residential property that is not a dwelling, such as an apartment building, and unimproved land pay 0.75% on the full price.

A residential dwelling is tiered: 0.75% on the first $800,000, 1.25% on the portion from $800,000 to $2,500,000, and 2.25% on anything above $2,500,000, a bracket that took effect July 1, 2020. A single-family or condominium rental over $2.5 million therefore pays the highest conveyance rate in the state even though it is an investment.

Every town adds 0.25%, and eighteen targeted investment communities plus Bloomfield may charge 0.5%; the OLR reports that all of the eligible towns except Groton, Stamford and Thomaston had done so. The relief attached to the 2.25% tier, a credit usable for three years beginning in the third tax year after payment, is available only to taxpayers who remain Connecticut residents and is claimed through the income tax, so an investor who moves away cannot use it.

• Commercial or industrial building: 1.25% state plus 0.25% or 0.5% municipal.
• Apartment building or vacant land: 0.75% state plus the municipal share.
• Single-family or condo rental: tiered 0.75% / 1.25% / 2.25% plus the municipal share.

The 6.99% top rate and benefit recapture that a deferred gain avoids

Connecticut has no separate capital gains rate; the gain, including depreciation recapture, joins the rest of your income on Form CT-1040 and runs through seven brackets from 2% to 6.99%. The 6.99% bracket starts at $500,000 for single filers and $1,000,000 for joint filers, and these brackets apply to the 2024 tax year and after, so they are the rates for 2026.

Two benefit-recapture provisions then take back the lower brackets: high-income filers add up to $3,150 (single) or $6,300 (joint), which effectively taxes all of their Connecticut AGI at 6.99%. A large one-time real estate gain is exactly the kind of income that pushes a filer through those recapture thresholds.

Because Connecticut AGI begins with federal AGI, gain that federal law defers under section 1031 never enters the Connecticut computation. There is no state election, no separate schedule, and no Connecticut-only recognition event; the federal eligibility rules decide the Connecticut result.

No withholding at the closing table, but nonresidents still file CT-1040NR/PY

Unlike the states that hand nonresident sellers a withholding form at closing, Connecticut requires neither the buyer nor the closing attorney to retain income tax out of a nonresident's sale proceeds. The only tax return the town clerk needs at recording is the OP-236 conveyance return.

The obligation shifts to the annual return: a nonresident with income derived from sources within Connecticut, which includes gain on Connecticut real estate, files Form CT-1040NR/PY for the year of sale. In a fully deferred exchange there is no recognized gain to report, so the nonresident's Connecticut filing for that property simply ends.

Connecticut also imposes no ongoing reporting on deferred gain. There is no Connecticut counterpart to California's form FTB 3840, which California requires annually for as long as the deferred gain stays unrecognized, so exchanging Connecticut property for property in another state leaves no Connecticut filing tail.

Selling the LLC instead of the deed triggers the 1.11% controlling interest tax

Investors sometimes sell the membership interests of the LLC that owns a building rather than the building itself. Connecticut anticipates this: the controlling interest transfer tax under section 12-638b charges 1.11% of the present true and actual value of the Connecticut real property when more than 50% of an entity that owns it is transferred for consideration.

The transferor files Form AU-330 by the end of the month after the transfer. The rate is close to what a commercial deed would have paid, so restructuring a sale as an entity sale to sidestep conveyance tax rarely works, and an entity-interest sale also raises separate questions about whether the transaction can qualify for exchange treatment at all.

Five-year revaluations, not sales, drive Connecticut property tax bills

Connecticut assessors revalue all real property every five years under section 12-62 and assess it at 70% of fair market value; in the years between, the assessment carries forward from the prior grand list. A sale or exchange is not itself a reassessment event, so the price you pay for Connecticut replacement property does not automatically become next year's assessment.

Towns may phase in revaluation increases over five years, and the OLR notes that some have been allowed to shift burden between residential and non-residential classes. Check the town's last revaluation date before buying replacement property here; a purchase the year before a revaluation can bring a larger step than the purchase price suggests.