Washington, DC Transfer Tax and Recordation Tax in a 1031 Exchange

The District charges two taxes on one deed, and a 1031 exchange does not exempt either

When a deed to District property is recorded, the Recorder of Deeds collects a recordation tax under DC Code section 42-1103 and a transfer tax under DC Code section 47-903. Each starts at 1.1% of the consideration, or fair market value if the stated consideration is nominal or missing, and each adds 0.35% to every deed except residential property transferred for less than $400,000. That is how the Recorder's FAQ arrives at 1.1% below the line and 1.45% at or above it.

The $400,000 figure is a cliff. The FAQ applies the higher rate "on the entire amount, if transfer is $400,000 or greater," so a $399,000 condo deed costs 2.2% all in and a $401,000 deed costs 2.9%. Only residential property ever sees the lower rate; an apartment building, a retail bay or a parcel of land pays 1.45% twice at any price.

DC Code section 42-1102 lists the exempt deeds: governments and certain nonprofits, purchase money deeds of trust recorded with the deed, transfers between spouses and close family for no consideration, moves into and out of revocable trusts, tax deeds and a list of named projects. There is no exemption for a like-kind exchange, for a deed to or from a qualified intermediary, or for an exchange accommodation titleholder.

The statute says who is liable; the contract says who writes the check

The two statutes name different parties. Section 47-903 puts the transfer tax on the transferor and makes the transferee jointly and severally liable only if the transferor fails to pay. Section 42-1103 makes the parties to the deed jointly and severally liable for the recordation tax without ranking them. Neither says who must fund which tax at the settlement table; the purchase contract does.

Whatever the contract says, the District keeps its collection rights, so a tax the other side promised to carry and did not can still be collected from you. Confirm the allocation in writing before the qualified intermediary wires funds.

Both taxes are reported on Form FP-7/C, which the Recorder's forms list labels ROD 1, with the Affidavit Addendum (ROD 2) and a security affidavit where a deed of trust records at the same time. A transfer of a controlling interest in an entity that owns District real estate is reported on the economic interest return (ROD 5) instead.

Commercial deeds over $2 million are back at 1.45% each

From October 1, 2019 the District added 1.05% to each tax on deeds of commercial (class 2) property with consideration of $2 million or more, lifting each tax to 2.5% and the combined cost to 5%. OTR Tax Notice 2019-05 explained the surcharge and stated that it "expires September 30, 2023."

The expiry held. The current text of sections 42-1103 and 47-903 contains only the 1.1% base and the 0.35% addition, so a $5 million office deed recorded today pays 2.9% combined, the same as a $500,000 duplex. A settlement estimate still showing 5% on a commercial deed is running on the expired schedule.

A reverse exchange can pay the taxes twice

In a reverse exchange the replacement is bought before the relinquished property sells, and an exchange accommodation titleholder holds it meanwhile. Under Rev. Proc. 2000-37 the titleholder must hold "qualified indicia of ownership," defined as legal title, equivalent ownership under commercial law, or the interests in a disregarded entity that holds title, and must transfer the property to you no later than 180 days after taking it. That is two conveyances of the same District property inside six months.

The District taxes both. The first deed pays recordation and transfer tax at ordinary rates. The second is a new deed of title with no exemption in section 42-1102 to shelter it, and because the consideration between the titleholder and you is often nominal, the statutes substitute fair market value as the base.

Holding the parked property in a single-member LLC and assigning the membership interest to you at the end does not avoid the second bite. DC Code section 42-1102.02 treats the transfer of a controlling interest in an entity whose District real property is 80% or more of its tangible assets, or that earns more than half its gross receipts from District real estate, as a taxable transfer of an economic interest, and the Recorder's FAQ puts that rate at 2.9%. Price the second round before parking a replacement in the District.

Where the taxes land in your exchange math

The qualified intermediary may pay both taxes from sale proceeds without breaking its safe harbor. Reg. section 1.1031(k)-1(g)(7) disregards transactional items that "appear under local standards in the typical closing statements," naming "recording or transfer taxes," and the instructions for Form 8824 reduce boot on line 15 by exchange expenses, with any unused amount added to basis on line 18.

A hypothetical with round figures: you sell a $1,500,000 District rental building and the contract has you pay the transfer tax, 1.45% or $21,750; the buyer's recordation tax is another $21,750 that never touches your statement. You buy a $1,500,000 replacement in Maryland, so the District collects nothing on the purchase. Had you parked that replacement inside the District in a reverse exchange, the titleholder's purchase would have paid 2.9% and the titleholder's deed to you at fair market value could pay a further $43,500. Run your own numbers with your CPA.

If the exchange later fails, nothing changes at the Recorder's office: the taxes were due on the deed, not on the deferral, and the ROD 25 refund claim exists for overpayments, not for income tax outcomes. Reporting boot leaves the District taxes where they were; your only relief is the federal reduction of boot by the amount paid.