1031 Exchange in Massachusetts: Form NRW, the 4% Surtax and Claw-Back

Sales of $1,000,000 or more now go through Form NRW at closing

Since November 1, 2025, every sale or exchange of Massachusetts real estate with a gross sales price of $1,000,000 or more must be reported to the Department of Revenue on Form NRW, Nonresident Real Estate Withholding, within 10 days of closing. The closing attorney or title company is the withholding agent; if there is none, the buyer takes on the job.

The form is due even when nothing is withheld. Each seller hands the withholding agent a signed Transferor's Certification on or before closing, and DOR waived penalties on withholding agents only for closings between November 1 and December 31, 2025.

The $1,000,000 test looks at the whole transaction, not each owner's share. DOR's own example is a $1,600,000 building owned equally by four people: each receives under $1,000,000, yet withholding is calculated for every one of them.

• Default withholding on a nonresident individual: 4% of the gross sales price, which includes debt the buyer assumes.
• Alternative calculation, by election only: 5% of the estimated net gain.
• Either way, an extra 4% is withheld on the portion above the 2026 surtax threshold of $1,107,750.
• Full-year residents, resident trusts, estates of resident decedents and pass-through entities are exempt, but only if they file the certification.

How an exchanging seller keeps the proceeds with the qualified intermediary

Regulation 830 CMR 62B.2.4(6) says withholding is generally not required on gain that is deferred under Section 1031. To use that rule, the seller fills in the Part 3, Section 3 oval on the Transferor's Certification stating that all or part of the gain will be deferred through a qualified intermediary, and in doing so consents to Massachusetts jurisdiction to collect the tax when the gain is eventually realized.

Any boot is still withheld on. The regulation requires withholding on gain recognized under Section 1031(b), so cash taken at closing or debt that is not replaced is subject to withholding even though the rest of the transaction qualifies.

If the exchange later fails, the seller must notify the Commissioner in writing within ten days after the identification and closing periods expire and remit the amount that would have been withheld with the next estimated payment. That turns the federal identification and closing periods into a Massachusetts compliance matter, not only a federal one.

A seller with no certification at closing is withheld on the gross price at the full rate, so the qualified intermediary and the closing attorney should have the form signed before the closing date.

Massachusetts taxes the gain at 5%, or 8.5% for short holds, with a 4% surtax above $1,107,750

For tax year 2026, long-term capital gain from a Massachusetts rental or commercial property is taxed at 5%, the same rate as wages and rent. Gain on property held one year or less is short-term and taxed at 8.5%.

On top of either rate, the 4% surtax applies to the portion of taxable income above $1,107,750 in 2026; the threshold was $1,083,150 for 2025 and moves with inflation each year. The surtax base is the sum of Part A, Part B and Part C income, so one large sale can push a landlord who is normally far below the line into the 9% combined rate for that year.

Because the surtax is measured by the year's taxable income, deferring the gain through an exchange removes the sale itself from the 2026 calculation. That is the main state-level reason Massachusetts owners exchange rather than sell.

Nonresidents report the gain on Form 1-NR/PY. Gain from real property located in Massachusetts is Massachusetts-source income, so a Vermont or New Hampshire owner of a Massachusetts triple-decker pays Massachusetts tax on the sale even though they live elsewhere.

The claw-back: Massachusetts appreciation stays Massachusetts income after the property leaves

Massachusetts does not tax the gain deferred in a like-kind exchange. But 830 CMR 62.5A.1(3)(d) adds that when the taxpayer later disposes of the property acquired in the exchange, the part of the gain that reflects appreciation of the Massachusetts real estate is Massachusetts-source income.

In practice a nonresident who exchanges a Worcester apartment building for a Texas warehouse owes Massachusetts tax on the Worcester appreciation when the Texas warehouse is sold in a taxable sale. The obligation is reported on the Massachusetts return for the year the replacement property is sold.

Rolling from one exchange into the next keeps the gain deferred for Massachusetts as well as federal purposes. The jurisdiction consent on the Transferor's Certification is how DOR keeps a hook on nonresidents who exchange out of state.

For a Massachusetts resident the rule matters less, because residents are taxed on all income wherever the property sits; it becomes relevant if the owner moves away before the replacement property is sold.

Deed excise stamps: $4.56 per $1,000 statewide, $6.48 on Cape Cod

Massachusetts charges a deeds excise of $2.28 for each $500 of consideration, which works out to $4.56 per $1,000, on deeds recorded for more than $100. Under G.L. c. 64D, § 2 the excise is paid by the person who makes the deed, so by law and by custom it falls on the seller.

Barnstable County is the exception. The registry there collects $6.48 per $1,000, made up of a $3.42 state rate and a $3.06 county rate, after rounding the consideration up to the next $500.

An exchange does not change the stamps. The deed to your buyer is recorded for full consideration whether the proceeds go to you or to the qualified intermediary, and taking a DST interest instead of deeded Massachusetts land avoids a second set of stamps on the replacement side.