South Carolina Forms I-290 and I-295 in a 1031 Exchange

The buyer withholds at the top individual rate, and the capital gain deduction does not help

Section 12-8-580 requires anyone purchasing real property, or real property with associated tangible personal property, from a nonresident seller to withhold South Carolina income tax. For individuals, partnerships, trusts and estates the withholding is a percentage equal to the maximum individual rate; for corporations it is five percent. If the seller gives an affidavit of gain the percentage applies to the gain, otherwise to the amount realized, and in either case the buyer withholds no more than the entire net proceeds.

Form I-290 (revised 7/17/23) no longer prints a number. Line 2 says to multiply by South Carolina's top marginal individual income tax rate for the tax year of the sale, and the Department's Information Letter 26-20 reports that Act 110 of 2026 set two brackets for tax years beginning after 2025 with a top rate of 5.21% on taxable income of $30,000 or more. The instructions add that the net capital gain calculation is not taken into consideration when figuring the withholding percentage; the 44% long-term gain deduction shows up only on the SC1040.

The return and payment are due by the 15th day of the month following the month of the sale, with four copies of the I-290: two for the buyer and two for the seller, one of which the seller attaches to the income tax return to claim the credit. Residents and deemed residents, meaning businesses with two years of South Carolina filings that will continue in the state, give an I-295 and are not withheld at all.

A simultaneous exchange is a checkbox on the I-295, and the buyer just keeps the form

Form I-295, Seller's Affidavit Nonresident Seller Withholding (revised 6/28/22), is an affidavit of facts the seller swears before a notary and gives to the buyer. Item 16 is headed Like Kind Exchange and has three boxes. The first states that this is a simultaneous exchange and the seller is deferring the entire gain under section 1031; the second, that the seller will be recognizing part of the gain, with the amount entered in item 12.

Revenue Ruling 09-13 lists transfers that are not subject to withholding, and item 3 is like-kind exchanges that are tax deferred under section 1031, with the note that tax must be withheld where replacement property has not been identified at the time of sale. A true simultaneous swap, where relinquished and replacement property close together, is therefore exempt on the affidavit alone, and withholding applies only to the extent the affidavit states gain will be recognized.

The buyer is not required to obtain the affidavit, but must have evidence to prove the correct amount was withheld, and the I-295 is that evidence. It is kept with the buyer's tax records and not sent to the Department unless requested.

A deferred exchange uses box 16c, a pre-signed I-290 and a contract with the intermediary

Because no one can guarantee at the first closing that a deferred exchange will be completed, the Department gives two options in Question 22 of Revenue Ruling 09-13. Option 1 is simple and expensive: the seller pays the withholding from personal funds so that all of the sale proceeds reach the intermediary, the buyer remits on an I-290 by the 15th of the following month, and once the exchange is done the seller asks for the money back.

Option 2 keeps the cash in the exchange. The seller gives the buyer an I-295 with box 16c marked, stating that the gain is intended to be deferred under section 1031 using a qualified intermediary, that the steps in Revenue Ruling 09-13 have been completed, and authorizing the intermediary to release modified forms and otherwise confidential information. An I-290 is completed as if the sale were taxable and handed to the intermediary along with the amount necessary to pay the withholding. The buyer then enters into a contract with the intermediary under which the intermediary will file the I-290 and pay the withholding for the buyer if the transaction does not qualify, with the buyer remaining liable.

If the exchange qualifies, the I-290 is never filed and no payment is made; the buyer retains the affidavit and the contract and produces them on audit. The arrangement has to be set up before the first closing, so raise it with the buyer's attorney and with your intermediary at contract stage; what a qualified intermediary needs to open the exchange in South Carolina includes this contract.

Failed and partial exchanges: the intermediary pays by the 15th of the month after it becomes apparent

The ruling fixes the trigger. It will be apparent that the transaction will not qualify on the earlier of the date the exchange is abandoned or the date the time for the exchange expires, and the payment is due by the 15th day of the month following that month. If only part of the proceeds buys qualifying replacement property, the buyer's signature on the original I-290 authorizes the intermediary to submit a modified I-290 showing the revised amount realized or gain and the actual withholding, remit it, and send copies to buyer and seller.

Hypothetical: a Georgia resident sells a Greenville warehouse for $1,000,000 with $400,000 of gain, states the gain in item 12 of the I-295 and marks 16c. The intermediary holds an I-290 showing $20,840 (5.21% of $400,000). The exchange closes on day 150, so the form is destroyed and the $20,840 stays in the exchange account and buys replacement property. Had the seller abandoned the exchange on day 60, the intermediary would have filed the I-290 and paid $20,840 by the 15th of the following month and released the balance; run your own numbers with your CPA, since the amount withheld and the eventual South Carolina tax differ once the capital gain deduction applies.

If the exchange partly succeeds and some cash comes back as boot, the modified I-290 covers the recognized gain only. Whatever is remitted becomes a credit on the SC1040 for the year of sale; the Department will not route a refund back to the intermediary, so what the QI releases after a failed exchange is net of the South Carolina payment.

Refund mechanics have changed since the ruling, and the paperwork checklist

Revenue Ruling 09-13 refers to Form I-290X for recovering Option 1 payments. The current I-290 instructions say the I-290X is no longer used: a refund is requested by filing an I-290 with the Amended box checked, but only before the end of the seller's tax year of the sale. After year end the seller reports the gain, or the absence of gain, on the income tax return and takes credit for the withholding there. For an exchange that closes late in the year, Option 1 money may therefore sit with the Department until the following spring, which is why Option 2 is the usual route.

A seller who is a partnership, S corporation, estate or trust receives one I-290 in the entity's name and allocates the credit to owners. Each nonresident co-owner otherwise gets a separate I-290 and I-295. The general rules for state withholding at closing apply alongside these, and replacement property outside South Carolina, including a Delaware Statutory Trust, carries no South Carolina follow-up form.

• I-295 with box 16a (simultaneous), 16b (partial, gain in item 12) or 16c (deferred through a qualified intermediary), notarized, kept by the buyer
• For 16c: an I-290 completed as if taxable, delivered to the intermediary with the withholding amount
• For 16c: the buyer-intermediary contract to file and pay if the exchange does not qualify
• Evidence of residency or deemed residency on the I-295 for any co-owner who is not withheld