The short answer
A Virginia investor who sells investment real estate through a 1031 exchange defers Virginia income tax along with federal tax, because Virginia starts from federal adjusted gross income and conforms to Section 1031. Virginia imposes no withholding at closing and has no rule that claws back deferred gain when the replacement property sits elsewhere. The exchange leaves untouched the seller's grantor tax and, in Northern Virginia, two regional deed fees of $0.10 per $100 each.
Virginia at a glance
| Top state rate on real estate gains | 5.75% on Virginia taxable income over $17,000; gains are taxed as ordinary income |
|---|---|
| Conformity to Section 1031 | Yes; Va. Code section 58.1-301 adopts the IRC as of December 31, 2025 |
| Withholding at closing | None; nonresident landlords register with the Department of Taxation instead |
| Seller's grantor tax | $0.50 per $500 of price or value, whichever is greater |
| Northern Virginia regional fees | Two grantor-paid fees of $0.10 per $100 each |
| Hampton Roads regional fee | $0.06 per $100, paid by the grantor |
| Claw-back of deferred gain | None; Virginia does not track gain moved into out-of-state property |
| Bonus depreciation | Virginia decouples from the IRC section 168(k) special depreciation allowance |
Virginia's grantor tax and the Northern Virginia regional fees are due even when the sale is an exchange
A 1031 exchange defers income tax, not the charges Virginia collects when a deed is recorded. The seller's grantor tax under Va. Code section 58.1-802 is 50 cents for each $500 of the consideration or the property's value, whichever is greater, and the statute places it on the grantor unless the parties agree that the buyer will cover part of it.
In the counties and cities that belong to the Northern Virginia Transportation Authority, two more grantor-paid charges attach to the same deed. Va. Code section 58.1-802.3 adds a regional WMATA capital fee of $0.10 per $100, and section 58.1-802.4 adds a regional congestion relief fee of $0.10 per $100 in Planning District 8.
Together those three charges put the seller's recording cost in Northern Virginia at $0.30 per $100 of price, or $3,000 on a $1,000,000 sale, before the buyer's recordation tax. In the Hampton Roads transportation district, section 58.1-802.5 adds a regional transportation improvement fee of $0.06 per $100, again paid by the grantor.
The buyer's side is the state recordation tax of 25 cents per $100 under section 58.1-801, measured against the greater of the price or the most recent assessment, plus a local recordation tax that section 58.1-814 caps at one-third of the state amount. None of these statutes contains an exemption for like-kind exchanges, so the qualified intermediary structure changes nothing at the clerk's counter.
Virginia taxes real estate gains as ordinary income, topping out at 5.75% above $17,000
Virginia has no separate capital gains rate. Gain that lands in federal adjusted gross income flows into Virginia taxable income and is taxed under Va. Code section 58.1-320 at 2% on the first $3,000, 3% up to $5,000, 5% up to $17,000 and 5.75% on everything above that.
Because the top bracket begins at $17,000, almost the entire gain on an investment property sale is taxed at 5.75%. On a $600,000 gain, that is roughly $34,000 of Virginia tax that a completed exchange defers alongside the federal liability.
The deferral works because Va. Code section 58.1-301 conforms Virginia to the Internal Revenue Code as it stood on December 31, 2025, and Section 1031 is not among the provisions Virginia carves out. If the exchange qualifies under the federal rules described in our overview of what a 1031 exchange is, no Virginia gain is recognized either.
No Virginia withholding at closing, but nonresident landlords must be registered
Virginia does not withhold state income tax from a seller's proceeds, whether the seller is a resident or not. That sets it apart from West Virginia across the border, and it means a Virginia closing needs no state exemption certificate for an exchange.
What Virginia does require is registration. Under Va. Code section 58.1-316, a nonresident owner receiving $600 or more in a calendar year from renting Virginia real estate must register with the Department of Taxation on the form the Tax Commissioner prescribes, and a broker who manages the property must transmit that registration by the fifteenth of the following month or face a $50-per-month penalty.
The registration is an information filing, not a lien and not a withholding mechanism, so the full net proceeds move to the qualified intermediary at closing. A nonresident who has never registered should fix that before listing the property rather than discover it during the exchange.
Virginia has no claw-back when the replacement property leaves the Commonwealth
Some states track gain deferred on the sale of in-state property so they can tax it when the out-of-state replacement is eventually sold; California, Oregon, Massachusetts and Montana do this. Virginia has no such statute and no annual reporting form for deferred gain.
Once a Virginia property is exchanged into real estate elsewhere, Virginia's claim on the deferred gain depends only on whether the taxpayer is still a Virginia resident when a later taxable sale occurs. A resident reports that gain as part of federal adjusted gross income; a nonresident generally owes Virginia nothing on property outside the Commonwealth.
Reassessment runs on the locality's cycle, and land-use rollback can follow a farmland sale
Virginia does not reassess on sale; assessments move on locality-wide cycles. Va. Code section 58.1-3250 requires cities to reassess every two years (four years for cities of 30,000 or fewer), and section 58.1-3252 puts counties on a four-year cycle that can be shortened to three by vote or stretched to five or six years in counties of 50,000 or fewer.
An investor exchanging into Virginia property should look up where the locality is in its cycle, because the next general reassessment, not the purchase, drives the tax bill.
Farmland, forest and open-space land assessed under the land-use program in Va. Code section 58.1-3230 carries a rollback exposure. When the use changes to a non-qualifying one, section 58.1-3237 charges the deferred tax for the five most recent complete tax years plus simple interest, so a seller conveying land-use acreage to a developer should settle in the contract who bears that rollback.
Virginia decouples from bonus depreciation, which matters for bonus depreciation funds
Investors who pair an exchange with a bonus depreciation fund, or who take cash out and hope to offset the recognized gain with depreciation, should know that Va. Code section 58.1-301 specifically excludes the special depreciation allowance in IRC section 168(k) from Virginia conformity.
The federal deduction still applies, but Virginia requires depreciation to be computed without the bonus allowance, so the Virginia benefit arrives over the asset's normal recovery period rather than in year one. See our investment types page for how these funds differ from a DST, and take the Virginia adjustment to a CPA before relying on year-one deductions.
Replacement property
Exchanging Virginia property into a DST: what stays taxed and what defers
Most DST offerings hold property outside Virginia, so a Virginia investor who exchanges into one is generally acquiring an interest in real estate in another state. Rev. Rul. 2004-86 treats each beneficial owner as owning a fractional slice of the trust's real property for federal purposes, which is what lets the interest serve as replacement property in a traditional DST exchange.
Virginia continues to tax a resident on all income, including the rental income the DST passes through. The state where the DST's property sits may also tax that income to a nonresident, and whether Virginia credits that tax is a question for a Virginia CPA rather than something to assume.
For a Virginia seller the trade-off is concrete: the grantor tax and any regional fee are paid on the relinquished property regardless, while the 5.75% Virginia tax on the gain is deferred for as long as the exchange chain continues. Check each of these points with your CPA and the Virginia Department of Taxation before you sign the contract.
Qualified intermediaries serving Virginia
Virginia's Exchange Facilitators Act, in force since July 2010 and now at sections 55.1-800 to 55.1-806, is the lightest of the state statutes. It requires no license and, unlike the western states, no fidelity bond. Its protection is structural: section 55.1-802 requires exchange funds to sit in a separately identified account under the Treasury's section 468B rules or in a qualified escrow or trust, with withdrawals needing the client's written authorization and the facilitator's written acknowledgment, and section 55.1-804 bars commingling with operating accounts. Errors and omissions cover of $250,000 is required by section 55.1-803, change-of-control notice by section 55.1-801, and section 55.1-806 lets the Attorney General or a local attorney seek civil penalties of up to $2,500 per willful violation.
Statute: Code of Virginia sections 55.1-800 to 55.1-806 (Exchange Facilitators Act). No license, registration or fidelity bond. The Act regulates how funds are held and insured; a willful violation carries a civil penalty of up to $2,500 per violation (section 55.1-806). Checked on October 8, 2026.
What the Virginia statute requires
- Section 55.1-802: all exchange funds in a separately identified account under Reg. section 1.468B-6(c) or in a qualified escrow or qualified trust at a financial institution, with withdrawals requiring the client's written authorization and the facilitator's written acknowledgment.
- Section 55.1-803: errors and omissions insurance of at least $250,000 from an insurer authorized in Virginia, or cash or irrevocable letters of credit of at least $250,000.
- Section 55.1-804: an accounting for client money and property and no commingling of exchange funds with the facilitator's operating accounts.
- Section 55.1-801: notice to clients of a change in control.
- Section 55.1-806: a civil penalty of up to $2,500 per willful violation, plus the state's costs and attorney fees; no fidelity bond and no license are required.
Section 55.1-800 covers a person who, for a fee, acquires the rights to sell relinquished property located in Virginia as qualified intermediary, takes title to property located in Virginia as an exchange accommodation titleholder, or acts as qualified trustee or escrow holder, and any person who keeps a Virginia office to solicit exchange business. The two property-linked prongs are tied to Virginia property; the trustee and escrow prong is not.
Require these whatever the statute says
- A fidelity bond covering theft of client funds, and errors-and-omissions insurance, each evidenced by a certificate naming the insurer and the amount.
- A segregated qualified escrow or qualified trust account for your exchange funds under Reg. section 1.1031(k)-1(g)(3), at a named bank, from which money moves only on your written authorization and the intermediary's.
- A written exchange agreement that assigns your sale and purchase contracts to the intermediary, restricts your access to the funds under Reg. section 1.1031(k)-1(g)(6), and states who the escrow bank is.
- Confirmation that the firm is not a disqualified person under Reg. section 1.1031(k)-1(k): not your agent, attorney, accountant or broker within the past two years.
How to compare firms on these points: the qualified intermediary comparison and how to choose a qualified intermediary. Breakwater Exchange is not a qualified intermediary; the firm you appoint to that role is the one that holds the funds.
Questions investors ask about 1031 exchanges in Virginia
Does a 1031 exchange avoid Virginia's grantor tax on my sale?
No. The grantor tax under Va. Code section 58.1-802 is due when the deed is recorded, and the statute contains no exception for like-kind exchanges. The same is true of the two Northern Virginia regional fees and the Hampton Roads fee.
I live in Maryland and own a rental in Arlington. Will Virginia withhold tax when I sell?
No. Virginia has no withholding on real estate sales by nonresidents. You should already be registered under Va. Code section 58.1-316 as a nonresident owner receiving rent, and you will report the sale on a Virginia nonresident return unless the exchange defers the gain.
How much Virginia income tax does an exchange defer on a $500,000 gain?
Virginia taxes the gain as ordinary income, and the 5.75% bracket begins at $17,000, so nearly all of a $500,000 gain would be taxed at 5.75%, roughly $28,000. A completed exchange defers that amount together with the federal tax.
Will Virginia tax me later if I exchange into property in Texas and then sell it?
Only if you are still a Virginia resident when the later sale is taxable, because the gain would then be in your federal adjusted gross income. Virginia has no claw-back rule that follows deferred gain out of state.
Does selling land enrolled in Virginia's land-use program trigger rollback taxes?
The sale alone does not; a change to a non-qualifying use does. Va. Code section 58.1-3237 then imposes the deferred tax for the five most recent complete tax years plus interest, so allocate that risk in the purchase contract.
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 Virginia tax agency before you close. This page is general information, not tax or legal advice.
- Va. Code section 58.1-802 (grantor tax)
- Va. Code section 58.1-802.3 (regional WMATA capital fee)
- Va. Code section 58.1-802.4 (regional congestion relief fee)
- Va. Code section 58.1-801 (state recordation tax)
- Va. Code section 58.1-320 (income tax rates)
- Va. Code section 58.1-301 (conformity to the Internal Revenue Code)
- Va. Code section 58.1-316 (nonresident real property owner registration)
- Va. Code section 58.1-3237 (land-use roll-back tax)
