The short answer
A 1031 exchange of South Dakota investment property defers federal capital gains and depreciation recapture tax; there is no South Dakota income tax to defer, no closing withholding and no deferred-gain tracking. The seller still pays the state's real estate transfer fee of $0.50 per $500 of value as grantor, and the buyer's property tax classification follows how the buyer uses the property. A South Dakota seller who moves into a DST holding property in other states may pick up nonresident income tax filings in those states.
South Dakota at a glance
| State income tax on the gain | None; South Dakota levies no personal income tax and no corporate income tax |
|---|---|
| Conformity to IRC §1031 | Not applicable; there is no state income tax base to conform |
| Withholding at closing | None; the Department of Revenue administers no real estate withholding |
| Deferred-gain claw-back | None; South Dakota does not track gain deferred into other states |
| Real estate transfer fee | $0.50 per $500 of value or fraction, paid by the grantor (SDCL 43-4-21) |
| Property tax classes | Agricultural, nonagricultural, and owner-occupied single-family dwelling (SDCL 10-6-110) |
| Assessment basis | Full and true (market) value, equalized to 85% for tax purposes |
| Trust law | Rule against perpetuities not in force (SDCL 43-5-8); directed trusts under chapter 55-1B |
No South Dakota income tax: the exchange defers federal tax and nothing else
The Department of Revenue describes South Dakota as one of seven states with no state income tax, and its business tax page states plainly that South Dakota does not impose a corporate income tax. Selling a Sioux Falls fourplex or a Black Hills rental therefore creates only a federal tax bill, and that federal bill is what a 1031 exchange defers.
The state's only franchise tax is the bank franchise tax under SDCL chapter 10-43, which reaches banks, savings and loan associations, trust companies and similar financial institutions. An LLC or partnership whose business is holding rental real estate is not a financial institution and files nothing in Pierre on its rents or its gain.
Two consequences follow for an exchange seller. No South Dakota agency withholds anything from your closing proceeds, and there is no South Dakota counterpart to California's Form FTB 3840, the annual return California requires from taxpayers who exchange California property for out-of-state property. Gain you defer out of South Dakota is neither tracked nor clawed back by South Dakota.
South Dakota's $0.50-per-$500 transfer fee stays with the grantor in an exchange
SDCL 43-4-21 charges $0.50 on every $500 of value (or fraction of it) for the privilege of transferring title, and the statute places the payment on the grantor. On a $1,200,000 sale that is $1,200, collected by the county register of deeds at recording.
A deed to your buyer in an exchange is an ordinary transfer for this purpose; sending the proceeds to a qualified intermediary does not move the deed into any exemption in SDCL 43-4-22. When you buy South Dakota replacement property, the seller of that property is the grantor and pays the fee on that deed.
The exemption list matters for pre-exchange housekeeping. LLC-to-member transfers, deeds given for no consideration, and conveyances between a fiduciary and a beneficiary that accommodate the fiduciary relationship are all fee-exempt, which helps if title needs to be aligned before the sale. Whether such a transfer disturbs the same-taxpayer requirement of the exchange is a federal question for your advisor, not a fee question.
Full-and-true value, the 85 percent equalization, and why a rental is 'nonagricultural'
South Dakota assesses all property at full and true value, which SDCL 10-6-104 defines as the price a willing buyer would pay a willing seller in an open market, and the county director of equalization then equalizes that value to 85 percent for tax purposes. Nothing in this system resets value to a purchase price on sale, but a recent arm's-length sale is the clearest evidence of market value the director has. Owners who think an assessment exceeds market value can appeal it; the Department frames the right as being assessed at no more than market value.
SDCL 10-6-110 sorts every parcel into three classes: agricultural property, nonagricultural property, and owner-occupied single-family dwellings. A rental house, an apartment building or a commercial building is nonagricultural, the residual class, because the owner-occupied classification is limited by SDCL 10-13-39 to the one dwelling that is the owner's principal place of residence.
If you live in a duplex, triplex or fourplex you are selling, only the portion you occupy has been classified owner-occupied; the rented units have always been nonagricultural. The buyer's classification will depend on the buyer's own use, so a buyer intending to owner-occupy should ask the county director of equalization about the classification process.
Agricultural land is valued differently again. SDCL 10-6-127 assesses it on agricultural income value, capitalizing cropland at 35 percent of the annual gross return and noncropland at cash rent, both at a 6.6 percent capitalization rate. Selling farmland into an exchange does not change that method for the buyer as long as the land stays in agricultural use.
South Dakota trust statutes and a rental held in a trust
South Dakota's trust statutes are the reason many families hold real estate here in trust: the common-law rule against perpetuities is not in force under SDCL 43-5-8, and chapter 55-1B lets a trust instrument name a trust protector and separate investment and distribution trust advisors while excluding the trustee from those powers.
A trust that owns a rental can sell it and complete an exchange, but the trust, not a beneficiary, generally has to be the taxpayer that acquires the replacement property, so the intermediary agreement and the deeds should run in the trust's name. If the trust is a grantor trust for federal purposes the grantor is that taxpayer; if it files its own return, the trust is. Get the trustee, any investment trust advisor and your CPA aligned before the listing agreement is signed.
Replacement property
A DST replacement property from the South Dakota seller's side
Under IRS Revenue Ruling 2004-86, an interest in a properly structured Delaware statutory trust counts as owning a fractional piece of the trust's buildings, so it can serve as replacement property for a South Dakota sale. Breakwater Exchange brokers traditional DSTs from vetted national sponsors, and a cash-out DST exists for sellers who want liquidity later.
The state consequence is the one South Dakota residents rarely face at home: the DST's properties usually sit in states that do tax income. Because the ruling taxes DST investors as if they owned the buildings directly, your share of rents and of any eventual gain generally falls under the tax rules of the state where each building stands, and you may owe a nonresident return there even though you owe nothing to South Dakota.
South Dakota itself adds nothing on the way in. Buying a DST interest is not a deed recorded in a South Dakota county, so no transfer fee applies, and there is no state income tax on the distributions when they arrive. Review the sponsor's list of property states, then confirm the filing picture with your CPA and, where relevant, that state's revenue department before you identify.
Questions investors ask about 1031 exchanges in South Dakota
Does South Dakota tax the capital gain when I sell an investment property without an exchange?
No. South Dakota has no personal income tax and no corporate income tax, so the only tax on the gain is federal; the state's bank franchise tax reaches financial institutions, not landlords.
Who pays South Dakota's real estate transfer fee when I sell my relinquished property?
The grantor, meaning you as seller, under SDCL 43-4-21, at $0.50 per $500 of value. The exchange does not change that, and the seller of any South Dakota replacement property pays it on their own deed.
Will South Dakota withhold part of my sale proceeds because I live out of state?
No. South Dakota has no real estate withholding for resident or nonresident sellers because it has no income tax to secure, so the intermediary receives the full net proceeds.
Does my rental lose the owner-occupied property tax classification when it sells?
A rental was never classified owner-occupied; that class is limited to the owner's one principal residence under SDCL 10-13-39. The buyer's classification will follow the buyer's own use of the property.
If I exchange into a DST, does South Dakota track the deferred gain?
No. South Dakota has no deferred-gain reporting comparable to California's Form FTB 3840; the only follow-up filings are the nonresident returns you may owe to the states where the DST's properties are located.
Sources
The rules above were checked against these publications on September 18, 2026. Rates and forms change; confirm the current version with your CPA and the South Dakota tax agency before you close. This page is general information, not tax or legal advice.
- South Dakota Department of Revenue, Individual Taxes (no state income tax)
- South Dakota Department of Revenue, Business Taxes (no corporate income tax)
- SDCL 43-4-21, Imposition and amount of real estate transfer fee
- SDCL 43-4-22, Exemptions from real estate transfer fee
- SDCL 10-6-110, Classification of property
- SDCL 10-6-127, Agricultural land assessed on agricultural income value
- SDCL 43-5-8, Rule against perpetuities not in force
- IRS Revenue Ruling 2004-86 (Delaware statutory trusts and §1031)