The short answer
In most cases, yes. The gain recognized because of boot is in your federal income, and a state income tax built on federal income picks it up for the same year. Two things change the size of the bill: many states do not give capital gains a lower rate (California says so outright), and the state where the property sits can tax a nonresident on the boot while your home state taxes you as a resident. A state can also make the intermediary withhold from boot before you see it.
At a glance
| Starting point | Boot recognized federally flows into state taxable income |
|---|---|
| Rate | Some states, California among them, tax all capital gains as ordinary income |
| Character layers | The federal 25% and 15% split may not exist at the state level |
| Nonresidents | Real property gain is generally sourced where the property is located |
| Double claim | Home state taxes residents on all income, usually with a credit for tax paid elsewhere |
| California withholding | The intermediary must withhold if boot exceeds $1,500 |
| Washington | Real estate is exempt from its capital gains excise tax |
The state gets the boot because it starts from the federal number
Under section 1031(b), gain is recognized up to the money and other property you receive. Once it is recognized on the federal return it sits inside adjusted gross income, and that is the number most state returns begin with.
Deferral works the same way in reverse. The part of the gain the exchange shelters federally is usually sheltered on the state return as well, which is the subject of does a 1031 defer state capital gains tax. Boot is simply the slice that was never deferred, so the state taxes it in the year the federal return does.
Timing follows the federal rules too. When the intermediary releases leftover cash in the year after the sale, the installment rules can move recognition into that later year, and California's withholding instructions credit tax withheld on boot to the year it was withheld for that reason.
The rate can be higher than you expect because states rarely split the layers
Federally, boot is taxed in layers: unrecaptured section 1250 gain at up to 25% under Topic 409, then capital gain at 0%, 15% or 20%, plus the 3.8% net investment income tax above $200,000 single or $250,000 joint. The ordering is covered in is boot taxed as recapture or capital gain first.
A state may ignore all of that. The California Franchise Tax Board puts it in two sentences: 'California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income.' On a California return the recapture slice and the capital gain slice of the boot are taxed alike, at the rate your other income puts you in.
Other states have their own preferences, exclusions or no income tax at all. Your state's page under 1031 exchange rules by state lists its own treatment and sources.
Two states can claim the same boot when you sell out of state
The state where the property sits generally taxes nonresidents on gain from it. California's Publication 1100 says 'California taxes real property based upon where the property is located', and it taxes residents on income from all sources.
That produces two claims on one dollar of boot when you live in one state and sell in another: the property state as source, your home state as residence. Home states usually relieve the overlap with a credit for tax paid to the other state; California's version for its residents is Schedule S, Other State Tax Credit. The credit rarely leaves you better off than the higher of the two rates.
Moving after the sale does not shake off the property state. Publication 1100's installment examples tax California-property gain received after the seller became a Washington resident.
Worked example: $100,000 of boot on a California rental
Hypothetical, round numbers. A California resident sells a California fourplex, completes the exchange, but $100,000 is left with the intermediary at day 180. The property carries more than $100,000 of past depreciation, so the federal tax is up to 25% plus 3.8% NIIT, about $28,800 at the top of both.
California taxes the same $100,000 as ordinary income at the owner's regular rate, with no separate recapture or capital gain rate. Because the boot is over $1,500, the Form 593 instructions require the intermediary to withhold before paying it out; that withholding is a credit against the California bill, not an extra tax.
Change one fact: the owner lives in Nevada. California still taxes the $100,000 as California-source income on a nonresident return. Run your own numbers with your CPA.
What to check before you accept boot or pick a replacement
Look up three things for each state involved: whether it taxes gains at ordinary rates, whether it withholds on boot or on the sale, and whether it requires an annual information return such as California's Form FTB 3840 for property exchanged out of state.
Some states have no tax on this gain at all. Washington's capital gains tax exempts the sale or exchange of real estate. The withholding forms are collected in states that withhold at closing and state withholding at closing.
If the boot is coming from leftover proceeds, it may still be avoidable. A trust interest named on your identification list can absorb an odd remainder before day 180, as leftover cash after a 1031 exchange explains.
Related questions
If my state has no income tax, is boot only taxed federally?
Only if the property is also in a state that does not tax the gain. The state where the real property sits can tax a nonresident on it.
Does my state tax the depreciation part of boot at 25%?
The 25% cap is a federal rule. A state that taxes all gains as ordinary income, as California does, applies its regular rates to the whole amount.
Will the intermediary withhold state tax from my boot?
Some states require it. California requires the intermediary to withhold when boot exceeds $1,500; check the state page for your property.
Can I get credit in my home state for tax paid to the property state?
Usually, through a credit for taxes paid to another state, but the rules and limits are the home state's; California's resident credit is claimed on Schedule S.
Is the withholding the final state tax?
No. Withholding is a prepayment credited on the state return, where the actual tax is figured.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- 26 U.S.C. Section 1031
- IRS Topic 409, capital gains and losses
- IRS, Net investment income tax
- California Franchise Tax Board, Capital gains and losses
- California Franchise Tax Board, Publication 1100, Taxation of Nonresidents and Individuals Who Change Residency
- California Franchise Tax Board, 2026 Instructions for Form 593
- California Franchise Tax Board, 2025 Instructions for Form FTB 3840
- Washington Department of Revenue, Capital gains tax