Do I pay transfer tax on both legs of an exchange, the sale and the purchase?

Section 1031 is an income tax rule, and transfer taxes are charged on the deed

Section 1031(a) says no gain or loss is recognized on a qualifying exchange. That governs your federal income tax return. Transfer, deed, documentary stamp and excise taxes are imposed by states, counties and cities on the conveyance itself, under their own statutes, and only those statutes can exempt an exchange.

So when you sell, the deed from you to your buyer is taxed under the rules where that property sits, and when you buy, the deed from your seller to you is taxed under the rules where the replacement sits. The exchange connects the two for income tax; it does not merge them into one conveyance for deed tax.

Which side pays depends on the jurisdiction and the contract. Your state's page on the state 1031 hub and the closing pages such as Washington REET and Florida documentary stamps set out the local rule.

Direct deeding keeps a forward exchange at two taxed deeds, not four

The intermediary has to acquire and transfer both properties, but paragraph (g)(4)(iv) treats it as doing so when it is assigned the contracts and the property passes directly between the real parties. Your deed goes to your buyer and your seller's deed comes to you, so no deed is recorded into or out of the intermediary.

That is why a forward exchange should cost no more in transfer tax than an ordinary sale and an ordinary purchase. If a closing agent proposes deeding through the intermediary, ask why, because each extra deed is a potential extra taxable transfer.

Reverse and improvement exchanges can add a taxed deed, and the state decides

When a titleholder holds the replacement under Rev. Proc. 2000-37, it acquires title and later deeds the property to you, so there are three deeds where a forward exchange has two. Section 4.04 of the revenue procedure says the federal safe harbor survives even if a state taxes the arrangement differently, which leaves the state free to tax every deed.

Washington's rule shows how one state handles it. Under WAC 458-61A-213, the facilitator's acquisition is taxable, and its later transfer in completion of the exchange is exempt only if the tax was paid on the first transfer, the facilitator signs a supplemental statement, and the funds it used came from the grantee or the grantee's sale proceeds. In the rule's own reverse-exchange example, the facilitator's sale of the parked property to a new buyer is taxed because the new buyer did not provide the funds.

The structure is explained in the reverse exchange guide; ask the titleholder and your closer for the state's treatment before you commit.

A hypothetical: a 1% deed tax in a forward and a reverse exchange

Hypothetical figures: both properties are in a jurisdiction with a flat 1% deed tax paid by the seller. You sell for $800,000 and buy for $1,000,000 in a forward exchange. You pay $8,000 on your sale; the $10,000 on the purchase is your seller's cost under that local rule.

Now run it as a reverse exchange where the titleholder buys the $1,000,000 replacement and later deeds it to you. If the jurisdiction taxes the titleholder's deed with no exemption, a second $10,000 arises on that transfer, and the titleholder agreement will usually make it your cost. Real rates, payers and exemptions differ by state. Run your own numbers with your CPA.

Pay it from the exchange account, and check the DST side

Paragraph (g)(7)(ii) lists 'recording or transfer taxes' among the transactional items that can be paid from exchange funds without breaking the money restrictions, and they count as exchange expenses on Form 8824. The full list is in closing costs paid from exchange funds.

When the replacement is an interest in a Delaware Statutory Trust, you sign subscription documents and receive a beneficial interest rather than a deed, so there is no recorded conveyance to you on the purchase leg; any transfer tax on the trust's own acquisition is part of the trust's costs.