Delaware's 4% Transfer Tax and a 1031 Exchange

Four percent, split down the middle by statute

30 Del. C. section 5402(a) imposes a state tax of 3% of the value of the property, reduced to 2.5% where the municipality or county has enacted the full 1.5% local tax that state law authorizes. Nearly every Delaware jurisdiction has, so the combined rate is 4%. The same subsection states that the tax "is to be apportioned equally between grantor and grantee."

The Division of Revenue's first-time home buyer page confirms the history: in August 2017 the state rate rose from 1.5% to 2.5% where a local tax applies, and to 3% elsewhere, and "realty transfer taxes are typically shared equally by the buyer and the seller." The return has a line for the percentage of responsibility of each party, so a contract that shifts the split is recorded on the form.

Hypothetical: a $1,000,000 Wilmington apartment building sells inside an exchange. The transfer tax is $40,000, and with the statutory split the seller pays $20,000 from the proceeds and the buyer pays $20,000 at recording. The seller's half is a transactional cost paid from exchange funds without creating boot, as explained on closing costs paid from exchange funds. Run your own numbers with your CPA.

Form RTT-TAX, formerly Form 5402, and how value is measured

The return is now titled Form RTT-TAX, Realty Transfer Tax Return and Affidavit of Gain and Value; the instructions, revised October 17, 2024, carry the same content as the old Form 5402. Part C asks for the consideration on line 2, the highest assessed value for local tax purposes on line 3, and taxes the greater of the two on line 4 at the 4% rate on line 5, less the 1.5% local share on line 6.

Section 5401(4) defines value as "the amount of the actual consideration thereof, including liens or other encumbrances thereon and ground rents," and where the consideration is below the highest appraised value, the appraised value controls unless the parties show that fair market value is lower. An arm's-length sale between unrelated parties establishes fair market value, which is what an exchange sale to a third-party buyer is.

Line 7 preserves a 1% reduction for contracts executed before August 1, 2017, with the contract or an affidavit attached. Part D is where an exemption is explained, citing the section 5401 paragraph relied on; a transfer from a trustee, nominee or straw party under section 5401(1)(j) must attach the conveyance into that party. The return is notarized and filed with the deed.

Exchanges are taxed in full, and like-kind property is valued at market

The instructions address exchanges directly. For line 2: "If consideration also includes the exchange of like kind property, include the full and complete market value of the real estate received in determining the consideration to be taxed at 2.5% by the State of Delaware and 1.5% by either the municipality or the county." A direct swap of Delaware parcels therefore pays 4% on each deed at market value, and a cash sale through a qualified intermediary pays 4% on the price.

The qualified intermediary should never appear in the chain of title. Under Reg. section 1.1031(k)-1(g)(4)(iv) the intermediary is treated as acquiring and transferring the property when it enters the agreements, so the deed runs from you to the buyer, and from the replacement seller to you. One deed, one 4% tax, on each leg.

A reverse exchange records two deeds on the parked property. Section 5401(1) exempts a deed "to a trustee, nominee or straw party for the grantor as beneficial owner" and transfers out of such a party, which is the provision an accommodation titleholder structure would look to, and the return requires the conveyance into the straw party to be attached when it is claimed. Whether a titleholder that holds title for your benefit under Rev. Proc. 2000-37 qualifies is a question for Delaware counsel before the structure is signed; the mechanics are on the reverse 1031 exchange guide.

The first-time buyer reduction does not reach an investment purchase

Section 5402(c) reduces the grantee's tax by "1/2 percent multiplied by the lesser of the value of the property or $400,000," which the Division's page describes as a maximum of $2,000 and a cut from 1.25% to 0.75% for most buyers. The grantor's half is unaffected.

The conditions are the problem for an exchanger. The buyer must never have held a direct legal interest in residential real estate and must intend to "occupy the property being conveyed as the natural person's principal residence within 90 days following the transaction." An investor buying replacement property holds investment property by definition, and property acquired in a section 1031 exchange must be held for investment or business use, so the reduction is unavailable even on a first purchase.

The same logic applies to the other residential-flavoured relief. Delaware's exemptions turn on family relationships, entity continuity and government parties, not on the use the buyer will make of the property, and none refers to the income tax treatment of the sale.

Entity transfers, the nonresident prepayment and planning the Delaware closing

Selling the entity instead of the deed is caught by the instructions' fourth category: "any writing purporting to transfer an intangible interest in a corporation, partnership, or trust where the beneficial owner(s) before the conveyance(s) owns less than 80% of the beneficial interest after the conveyance(s)." A buyout that moves more than 20% of an entity holding Delaware real estate is a taxable transfer; the section 1031 side of partnership restructurings is on drop-and-swap 1031 strategies.

Delaware statutory trusts take their name from the state's trust statute, but a DST holding property elsewhere pays no Delaware transfer tax, and buying a fractional interest records no Delaware deed. A DST holding Delaware real estate paid the 4% when it bought, and that cost sits in the offering's load; what you own in a trust is explained on traditional DST 1031 exchange solutions.

The transfer tax is separate from the nonresident estimated tax Delaware collects at recording on the seller's gain, now on form REW-EST, where a section 1031 seller declares the exchange and pays nothing; that form is covered on Delaware Form 5403 for a 1031 exchange. Delaware's income tax on the gain and its 2.2% to 6.6% brackets are on 1031 exchange rules in Delaware.

• Sale: 4% of the greater of price or highest assessed value, 2% each side by statute, seller's half from exchange funds.
• Purchase: same 4% on the replacement deed; no first-time buyer reduction on investment property.
• Entity interest: taxable where the prior owners keep less than 80% afterward.
• Separate filing: REW-EST for the nonresident seller's exchange declaration.