A 1031 exchange is a tax strategy that allows you to defer paying capital gains taxes when you sell an investment property, as long as you reinvest the proceeds into a new, like-kind property. This means you can sell one property and buy another similar one without immediately paying taxes on any gains from the sale.
These like-kind exchanges are covered under Section 1031 of the Internal Revenue Code (hence the name "1031 Exchanges") and apply to federal capital gains taxes. However, each state has their own tax code, and may have different rules for real estate tax withholdings, the ability to complete a tax-deferred sale, or the rules around like-kind exchanges. Below we'll dive deep into these state-level specifics.
In West Virginia, there is a mandatory withholding requirement for the sale of real property by nonresidents. The withholding is either 2.5% of the total payment or 6.5% of the estimated capital gain from the sale. This withholding must be paid to the West Virginia State Tax Department within 30 days of the sale.
However, there are exemptions available:
To apply for an exemption, the transferor must file Form WV.NRAE (Application for Full or Partial Exemption) with the State Tax Department at least 21 days before closing.
For more detailed information, you can refer to West Virginia Code 11-21-71b.
The Combined Rate accounts for Federal, State, and Local tax rate on capital gains income, the 3.8 percent Surtax on capital gains and the marginal effect of Pease Limitations (which results in a tax rate increase of 1.18 percent).
West Virginia assesses an income tax on its residents, applying rates of 3% to 6.5% over 5 tax brackets
Many states recognize and follow the federal rules for a qualifying 1031 exchange. We recommending reviewing these resources for 1031 exchanges at the federal level - learn about the rules for an exchange, the key deadlines you must meet, and why you are required to work with a Qualified Intermediary like Deferred.com.
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