1031 Exchange in Idaho: The 60% Capital Gains Deduction, Farmland and DSTs

Idaho's 60% capital gains deduction is the number to weigh before you exchange

Idaho Code 63-3022H lets an individual deduct 60% of the capital gain net income from the sale or exchange of qualified property when computing Idaho taxable income. Real property held at least 12 months qualifies if it had an Idaho situs at the time of sale; land, qualified conservation easements, grazing permits transferred with base property and depreciable real property described in section 1250(c) are all covered.

With the flat 5.3% rate, a fully taxable sale of Idaho investment real estate is taxed by the state on only 40% of the gain, an effective 2.12%. Gains the Internal Revenue Code treats as ordinary income do not qualify, and the deduction is computed on Form CG and carried to Form 39R for residents or Form 39NR for nonresidents.

The deduction turns on where the property sits, not where you live: a Texas resident selling a Boise fourplex claims it on Form 43, while an Idaho resident selling a Nevada duplex gets nothing. That geography is the heart of the decision once a DST holding mainland property is on the table.

• Installment sales qualify only for the current year's taxable portion, and only if the 12-month holding period was met by the sale date.
• Owners of pass-through entities take the deduction on their own return from Form ID K-1, Part VI, line 36, and may count the entity's holding period.
• A partnership interest can qualify to the extent the gain is attributable to Idaho real property the partnership holds as a capital asset, supported by a qualified appraisal or county assessor valuation.

Exchanging out of Idaho defers the 5.3% tax but forfeits the deduction on the deferred gain

Idaho's income tax piggybacks on the federal computation, so section 1031 gain that federal law leaves unrecognized stays out of Idaho taxable income and nothing is due at closing. Idaho has no tracking form for replacement property outside the state; when that property is sold later, the state you then live in and the state where it sits decide the tax.

The catch is that the 60% deduction is only ever available for property with an Idaho situs. An Idaho resident who exchanges a Twin Falls warehouse into a DST holding Georgia apartments will, when the DST interest is later sold in a taxable transaction, pay Idaho's full rate on the whole gain, including the part deferred from Idaho.

Section 63-3022H(4) also governs holding periods after an exchange: the federal tacking rules of section 1223 apply, except that the holding period of property given up does not count if that property would not itself have been qualified Idaho property. Exchanging into Idaho from another state therefore restarts the 12-month clock, while an Idaho-to-Idaho exchange keeps it running.

For many sellers the federal deferral outweighs a 2.12% state charge, but an Idaho CPA should model both paths before the 45-day identification window starts running.

No transfer tax and no closing-table withholding in Idaho

Idaho has never enacted a state or county transfer tax, so an Idaho deed records with no documentary stamps whether the sale stands alone or opens an exchange. Nor is there any Idaho statute making the buyer or closing agent withhold income tax from a nonresident seller.

Idaho relies on the return instead: a nonresident must file Form 43 when gross income from Idaho sources exceeds $2,500, and gross income for this test means income before expenses or deductions, including gains from property sales. A completed deferred exchange produces no recognized gain, so a mainland owner with no other Idaho income often has nothing to file for that year, though boot or a failed exchange changes the answer.

Idaho residents are taxed on all income, including income from sources outside Idaho, and may claim a credit when another state taxes the same income; that credit is what later applies to DST income from other states.

Farmland, the agricultural classification and annual market-value assessment

Idaho assesses all property annually at market value as of 12:01 a.m. on January 1 (Idaho Code 63-205), so a sale does not trigger a special reassessment; the buyer's next bill simply reflects the assessor's updated value. Owner-occupied homes may receive a partial exemption that rentals and commercial buildings never do.

Farm and ranch land is valued differently. Under Idaho Code 63-604, land of more than five contiguous acres actively devoted to agriculture, or five acres or less that produced at least $1,000 of agricultural revenue and was farmed for the last three growing seasons, is assessed as agricultural land, and the statute ties that status to the exemption for the speculative portion of value in 63-602K.

Land in a platted subdivision whose restrictions prohibit agriculture, or used to graze animals kept for personal pleasure, does not qualify. A seller of qualifying farmland who exchanges into DST commercial property gives up that ag assessment along with the operating burden, and any recognized gain on the land, including grazing permits transferred with base property, is eligible for the 60% deduction.