Thinking about selling an investment property in Charlestown and rolling your gains into a bigger opportunity? You are not alone. With local prices near the million‑dollar mark and inventory tight, smart timing and clean execution can protect your tax deferral and your next move. In this guide, you will learn the 1031 basics, the Massachusetts rules that can surprise sellers, and practical replacement strategies that fit Charlestown’s market. Let’s dive in.
1031 basics in plain English
A Section 1031 exchange lets you defer federal capital gains tax when you sell investment or business real estate and buy other like‑kind real property. After the 2017 tax law, only real property qualifies, and U.S. property is not like‑kind with foreign property. See the IRS’s definition of real property and like‑kind rules in the final regulations for context. Read the IRS guidance on real property and like‑kind.
You report an exchange on IRS Form 8824 with your tax return for the year you transfer the relinquished property. The form calculates deferred and recognized gain and documents the exchange. Review the IRS Form 8824 instructions.
Two tax concepts often surprise investors:
- Boot is any cash or non‑like property you receive, including mortgage relief. Boot is taxable to the extent of gain.
- Depreciation recapture does not disappear. It carries into the replacement property and can be recognized later if you sell in a taxable sale.
The 45/180‑day clock
Timing rules are strict. You must identify replacement property in writing within 45 calendar days of your closing on the sale, and you must close on the replacement within 180 calendar days. These periods run at the same time. Missing either deadline typically disqualifies the exchange. A qualified intermediary should hold your proceeds to avoid constructive receipt. See a clear overview of the 45‑ and 180‑day deadlines.
Tip: Agree on assignment language in your sale and purchase contracts before signing and choose your intermediary early. A little prep makes the timeline far less stressful.
Massachusetts rules that matter
Massachusetts generally follows federal 1031 treatment for real property, so a qualifying exchange at the federal level can be deferred at the state level when documented correctly. Review the MA conformity guidance.
New $1M withholding rule
The Department of Revenue has proposed regulations that require withholding on sales or exchanges of Massachusetts real estate when the gross sales price is at least 1,000,000 dollars. The default method withholds 4 percent of the seller’s share of the gross sales price, with an alternative method based on estimated net gain and tax rate. The regulation includes procedures for like‑kind exchanges and lists an effective date of November 1, 2025. Given Charlestown’s price points, many transactions will meet this threshold. Read the proposed MA withholding regulation.
What it means: Work with your closing attorney, CPA and intermediary to prepare the Transferor’s Certification early. If your exchange later fails, you may need to notify DOR and pay tax.
Deeds excise at recording
Massachusetts imposes a deeds excise tax on real estate conveyances, commonly calculated at 2.28 dollars per 500 dollars of consideration. Exchanges are generally still subject to excise based on consideration given. Budget for this at closing. See the MA deeds excise directive.
Documentation to avoid surprises
Massachusetts emphasizes proper paperwork for 1031 treatment and to avoid improper withholding. Keep identification notices, intermediary agreements, assignment documents, and the Transferor’s Certification in order. Review MA’s 1031 information page.
Charlestown market reality
Charlestown is a high‑demand Boston neighborhood with historic row homes, waterfront condos and limited multifamily inventory. Recent data places typical home values around 950,000 to 1.1 million dollars, which brings many sales into the state’s 1 million dollar withholding scope and makes replacement choices competitive. See current Charlestown value trends.
What this means for you: Finding a like‑kind replacement in Charlestown can be tough within 45 days. Many local investors line up multiple options or look beyond the neighborhood for yield and selection.
Smart replacement strategies
Trade up locally
If you prefer to stay hands‑on and close to your asset, you can exchange from a smaller unit or condo into a larger local multifamily. This keeps control and local familiarity. The tradeoff is price per unit and scarce inventory.
Diversify beyond Boston
Some Charlestown sellers exchange into out‑of‑area properties that offer higher cap rates and lower prices. Remember that replacement must be U.S. real property held for investment or business. Check the IRS instructions on like‑kind.
Go passive with DSTs
Delaware Statutory Trusts can simplify identification because offerings are pre‑packaged and available in various price points. You gain passive income and professional management, but you give up control and liquidity. Some structures have leverage and sponsor provisions that can affect future 1031 flexibility. Understand DST advantages and risks.
Step‑by‑step checklist
- Engage your CPA, real estate attorney and choose a qualified intermediary before you list or sign contracts. Confirm fees and wiring procedures. See a typical exchange step list.
- Add assignment language to your sale and purchase agreements so your intermediary can step in properly.
- Map the 45‑ and 180‑day dates on a calendar the day you go under agreement. Identify multiple replacements under the 3‑property, 200 percent or 95 percent identification rules.
- Avoid constructive receipt. Do not handle proceeds; the intermediary should hold them. Review MA’s constructive receipt guidance.
- Match or exceed both equity and debt on your replacement to avoid taxable boot. See Form 8824 guidance on gain and debt.
- Prepare Massachusetts closing documents early. For likely 1 million dollar sales, complete the Transferor’s Certification and consider the alternative withholding calculation with your CPA. Read the MA withholding regulation summary.
- Budget for deeds excise on each conveyance. Confirm the excise rules.
Common mistakes to avoid
- Missing the 45‑day identification or 180‑day closing deadlines.
- Taking possession of proceeds, even briefly, which can void the exchange.
- Underestimating MA closing requirements, especially the proposed 1 million dollar withholding rule.
- Failing to plan debt replacement, which can create taxable boot.
- Choosing a DST without reading the offering documents and understanding fees, hold period and exit options.
When to start planning
Start before you list. The best outcomes come from lining up your intermediary, mapping critical dates, pre‑screening replacements and preparing state paperwork. If you are considering a reverse or improvement exchange, you will also want to model costs and timing well in advance. A short planning call can save weeks during the 45‑day sprint.
Ready to explore your options with a data‑driven plan and concierge execution? Connect with Michelle Roloff to map your 1031 timeline, model replacement scenarios and coordinate your team from listing through closing.
FAQs
What is a 1031 exchange and how does it work?
- A 1031 exchange lets you sell investment or business real property and buy other like‑kind real property while deferring federal capital gains tax, reported on IRS Form 8824.
What are the 45‑ and 180‑day deadlines?
- You must identify replacement property in writing within 45 days of closing your sale and close your replacement within 180 days; both clocks start at the sale closing.
How does Massachusetts treat 1031 exchanges?
- Massachusetts generally follows federal deferral for real property, but you must document properly at closing to avoid or reduce withholding on higher‑price sales.
What is the new Massachusetts $1M withholding rule?
- Proposed regulations require withholding on sales at or above 1,000,000 dollars, with special procedures for 1031 exchanges and an effective date stated as November 1, 2025.
Do I owe deeds excise tax in a 1031 exchange?
- Yes, Massachusetts typically charges deeds excise based on consideration for each conveyance, even when a transaction qualifies for tax deferral.
Can I exchange into property outside Massachusetts?
- Yes, you can exchange into U.S. real property in another state if both properties are held for investment or business use; foreign property does not qualify as like‑kind.
Are DSTs a good replacement option for Charlestown sellers?
- DSTs can help you meet deadlines and go passive, but they are illiquid and sponsor‑controlled; review risks, fees, leverage and exit provisions before investing.
