Connecticut Conveyance Tax and a 1031 Exchange

The state and the town both tax your deed, and no exemption covers an exchange

Conn. Gen. Stat. section 12-494 imposes the tax "on each deed, instrument or writing" conveying Connecticut realty for consideration of $2,000 or more: three-quarters of one percent to the state and one-quarter of one percent to the municipality, with higher state rates by property type in subsection (b). Subsection (c) lets a targeted investment community, or a town with a designated manufacturing plant, add up to another quarter percent. The Office of Legislative Research's 2017 backgrounder counted 19 eligible municipalities, all but Stamford charging the full extra 0.25%.

Section 12-498 exempts security instruments, government parties, tax deeds, partitions, corporate mergers and subsidiary-to-parent deeds, divorce and foreclosure decrees, deeds under $2,000, nonprofit and conservation transfers, deeds between spouses, relocation resales, principal residence short sales and deeds in lieu, crumbling foundation homes and affordable housing deeds. Exemption 17, "transfers or conveyances to effectuate a mere change of identity or form of ownership or organization, where there is no change in beneficial ownership," covers a deed into your own wholly owned LLC, not a sale.

A section 1031 exchange is not on the list and the OP-236 instructions carry no code for it. Your deed to the buyer, routed through a qualified intermediary's assignment, is a conveyance for consideration like any other; whether the gain is deferred is a question for the income tax return, covered under does a 1031 defer state capital gains tax.

Your rate depends on what the property was used for, not on who buys it

The OP-236 instructions sort consideration into four lines. Line 15 is unimproved land, with no buildings or other physical improvements, including farm, forest and open space land, at 0.75%. Line 16 is a residential dwelling, a single-family dwelling including a condominium or cooperative unit "whether or not owner-occupied," on the marginal 0.75%, 1.25% and 2.25% schedule. Line 17 is residential property other than a dwelling, which "includes apartment buildings, duplexes, nursing homes, and other multi-unit properties" but not hotels, at 0.75% on the whole price. Line 18 is nonresidential property at 1.25%.

Use is measured by the grantor's use at conveyance, and where uses are mixed, by "the use to which a preponderance of the square footage has been devoted." A mixed-use building with three apartments over a storefront is usually line 17 at 0.75%; a storefront with one apartment upstairs is line 18 at 1.25%.

The 2.25% tier applies only to a single dwelling, so a $4 million rental house pays it while a $4 million six-unit building does not. The dwelling thresholds are allocated across multiple deeds and grantors, so splitting one residential estate into two deeds does not reduce the tax.

The grantor files OP-236 and pays before the town clerk will record

Section 12-497 bars the town clerk from recording a taxable deed unless the return "has been filed with such town clerk and the tax reported to be due thereon has been paid." The grantor, the grantor's attorney or an agent files Form OP-236 through the DRS myCTREC portal, which the DRS forms page says has replaced e-REC, or on paper with the clerk; the town keeps its share and remits the state's within ten days.

A property in two towns needs a return in each with Form AU-263 allocating the price. Where the grantor is a partnership, S corporation, LLC, estate or trust, Schedule A lists each owner with a taxpayer identification number.

The qualified intermediary's assignment does not change the grantor: you sign the deed and the return, and the tax comes off the settlement statement before the balance is wired to the intermediary. On your Connecticut replacement purchase the seller is the grantor and pays.

The mansion tier comes with a partial income tax credit, three years later

When Public Act 19-117 added the 2.25% rate from July 1, 2020, per the DRS legislative summary, it paired it with a credit. Section 12-704c(d) allows a taxpayer who paid at 2.25% a credit against Connecticut income tax of one-third of the tax paid in excess of 1.25% on the consideration above $800,000, in each of three taxable years beginning with the third taxable year after the year of payment, with unused credit carried forward up to six years.

In plain terms, the extra 1% on the slice of a dwelling's price above $2.5 million comes back over three years to a seller who remains a Connecticut income taxpayer. A nonresident has nothing to credit against, and the full 2.25% is still paid at recording; note the credit in your post-closing file so it is not forgotten.

Selling the entity instead of the deed triggers the controlling interest transfer tax

Section 12-638b taxes the sale of a controlling interest in any entity holding Connecticut real property worth $2,000 or more at 1.11% of the property's value, payable by the seller of the interest, with transactions within six months presumed a series. A deed into your LLC under exemption 17 followed by a sale of the LLC interests swaps one tax for another and raises a federal problem, because an LLC interest is not like-kind property; see drop-and-swap exchanges.

A hypothetical with round figures: a $1,500,000 six-unit building in a base-rate town pays 0.75% state, $11,250, and 0.25% town, $3,750, for $15,000. A $1,500,000 warehouse pays 1.25% plus 0.25%, $22,500, or $26,250 in a town charging the extra quarter. A $3,000,000 rental house pays 0.75% on $800,000, 1.25% on $1,700,000 and 2.25% on $500,000, which is $38,500 state plus $7,500 town, with $5,000 creditable over three years if you remain a Connecticut taxpayer. Run your own numbers with your CPA.

Each figure is paid from exchange proceeds and reduces boot on Form 8824 line 15 under the instructions, because Reg. section 1.1031(k)-1(g)(7) names transfer taxes as transactional items the intermediary may pay.