1031 Exchange in New York: Rules, Taxes, and the IT-2663

The rules: federal statute, New York conformity

New York's personal income tax begins with federal adjusted gross income and applies a list of modifications, none of which touches gain deferred under IRC §1031. A like-kind exchange valid for federal purposes is valid for New York State and New York City purposes in the same year and amount, with no state election, no New York counterpart to Form 8824, and no additional holding or reinvestment condition. Bills to decouple New York from various federal provisions surface in most budget cycles; the ones enacted in 2026 targeted qualified small business stock and opportunity zone gain, and none has reached §1031. The exchange rules are therefore the federal ones: a qualified intermediary in place before the relinquished closing, written identification within 45 days, acquisition within 180 days or the return due date, and replacement of value and debt to avoid boot.

Where New York differs is in what happens around the exchange: the prepayment regime for nonresident sellers, the transaction taxes on each conveyance, and the local rules that govern what a buyer can do with a building after closing. Those are the subject of most of this guide.

The stakes: 10.9% plus the city's 3.876%

New York State taxes income on a graduated schedule that for 2026 runs from 3.9% to 6.85% on income above roughly $215,000 for a single filer or $323,000 for a joint return, then jumps to 9.65% above about $1.08 million single or $2.16 million joint, 10.3% above $5 million, and 10.9% above $25 million, under Tax Law §601. The high brackets, originally temporary, have been extended through 2032. A benefit-recapture provision phases out the lower brackets as income rises, so that a taxpayer above $25 million pays a flat 10.9% on every dollar. There is no capital gains preference. New York City residents pay a separate city income tax that tops out at 3.876% on taxable income above $500,000. A Manhattan resident selling a building at a large gain is therefore deferring up to 14.776% in combined state and city tax, which our state-by-state table places second only to California.

For most individual investors the marginal state rate on a real estate gain is 6.85% to 9.65%, because the gain itself pushes them through those brackets. On an $825,000 gain a city-resident couple with ordinary income of $300,000 would pay roughly $56,500 to the state and $32,000 to the city, about $88,500 together, on top of a federal bill near $213,000. The state and city share is close to thirty percent of the total, which is why New Yorkers exchange at gains that an investor in Texas or Arizona would simply pay tax on, and why the expensive mechanics below are usually worth it.

The IT-2663: prepaying tax at the recording office, and the box that waives it

New York does not withhold at closing in the way Georgia or Colorado do. It requires something stricter. Under Tax Law §663, a nonresident individual, estate, or trust selling New York real property must file Form IT-2663, compute the gain on the sale, and pay estimated income tax on that gain at the highest rate, 10.9%, before the deed can be recorded. The county clerk will not record a deed from a nonresident without the form or a certification on Schedule D of the transfer tax return that none is required. Sellers of co-op shares use Form IT-2664. The payment is a prepayment, not a separate tax; it is claimed as a credit when the nonresident files Form IT-203 the following year, and any excess is refunded then, not sooner.

For an exchanger the prepayment is the problem. Ten point nine percent of the gain on a $1.5 million sale with $825,000 of gain is nearly $90,000 that would leave the closing for Albany instead of the intermediary, and would not come back for a year. The IT-2663 instructions resolve it. Part 3 of the form contains a set of certifications under which no payment is required, and box 4B states that the seller is not required to recognize any gain or loss on the transfer under the Internal Revenue Code, other than under §121. The instructions direct a seller completing a §1031 exchange to mark box 4B, give a brief summary of the exchange, and indicate that it is a like-kind exchange. The form is still filed, but no money changes hands at recording. Settle this with your attorney and the intermediary when the contract is signed; the exchange documents should be in the closing file, and the completed IT-2663 should be ready before the closing date, because a recording held up for a missing form can push the relinquished closing past a date that matters.

Boot is the exception. If you receive cash, trade down in value, or reduce your debt without adding cash, part of the gain is recognized and the IT-2663 should show estimated tax on that part. A partial exchange in New York therefore means a partial prepayment at the recording office. New York residents are exempt from the IT-2663 regime altogether and certify residency on the same form; residents report the exchange on their regular return.

The New York clawback question

Google's suggestions for this search include the phrase New York 1031 clawback, so the question deserves a direct answer: New York has no clawback. There is no statute, regulation, or published guidance under which New York asserts tax on gain deferred from New York property when the replacement property is in another state and later sold by someone who is no longer a New York resident. The states that do this are California, with its annual Form 3840, along with Oregon, Montana, and Massachusetts.

Two real rules are mistaken for one. First, residents are taxed on everything. A New Yorker who exchanges a Brooklyn building into a Charlotte apartment complex and stays in New York will owe New York tax when the Charlotte property is sold for cash, not because New York tracked the deferred gain but because residents report income from all sources; move to North Carolina first and New York's claim ends. Second, Tax Law §631 sources to New York a nonresident's gain on the sale of New York real property and on the sale of an interest in a partnership, LLC, or closely held corporation whose assets are at least half New York real estate. That rule reaches a nonresident who sells the entity that owns the building rather than the building, and it applies to a drop-and-swap that goes wrong, but it does not follow deferred gain into property outside the state. Some practitioner websites assert that deferred New York gain keeps its New York character forever; we could find no authority for that position and do not rely on it.

Transfer and mortgage taxes on each leg

An exchange is two conveyances, and New York taxes each one. The state real estate transfer tax is $2 per $500 of consideration, or 0.4%, paid by the seller; in New York City an additional 0.25% applies to residential conveyances of $3 million or more and to all other conveyances of $2 million or more. The city's own transfer tax is layered on top: 1% on residential property up to $500,000 and 1.425% above, and 1.425% on commercial property up to $500,000 and 2.625% above, also paid by the seller. A $4 million Queens apartment building sold into an exchange therefore sends roughly $130,000 in transfer taxes to the state and city before the intermediary sees a dollar, and the seller of the replacement property pays its own set. Transfers by exchange are expressly conveyances; so are transfers of a controlling interest in an entity that owns real property, which closes the door on avoiding the tax by exchanging LLC interests. The reverse-exchange structure, where an accommodation titleholder briefly owns a property, generates its own conveyances and the Department has addressed how the tax applies to them.

Buyers of residential property pay the mansion tax, 1% on residences of $1 million or more statewide, rising in New York City through tiers to 3.9% at $25 million; it applies to a one-to-three family house or condo acquired as replacement property. Anyone financing a replacement property in the city pays the mortgage recording tax, which totals about 2.05% on loans under $500,000 and 2.8% on commercial loans of $500,000 or more, with the lender bearing a quarter point on smaller residential loans. A buyer who needs $2 million of new debt to satisfy the exchange's debt-replacement requirement pays about $56,000 to record it. The customary mitigation is a purchase CEMA, in which the buyer takes an assignment of the seller's existing mortgage and pays recording tax only on new money, and a seller marketing a leveraged building into the exchange market should be prepared to cooperate with one.

Property tax: why NYC has no reset-on-sale problem

In California, the hidden cost of exchanging a long-held building is the property-tax reset to the purchase price. New York City has no such mechanism, because the city does not value income property by its sale price at all. The Department of Finance places property in four classes: Class 1 for one-to-three family homes, Class 2 for other residential including rentals, co-ops, and condos, Class 3 for utilities, and Class 4 for commercial. Class 2 and 4 property is valued by capitalizing the income owners report on the annual RPIE filing, assessed at 45% of that value, and increases are phased in over five years for larger buildings. Tax rates for 2026 are about 12.44% for Class 2 and 10.85% for Class 4 of assessed value. A sale at a high price does not change the income the building produces, so the assessment does not jump; the buyer's bill is the seller's bill until the income changes. Class 1 property is valued on comparable sales but has its own caps on annual growth.

Outside the city, each town or city assesses on its own cycle at its own uniform percentage of value, reassessment is encouraged but not required by state law, and no statute resets value on a sale, though a well-publicized price will draw an assessor's attention in a town that reassesses frequently. Two 2026 changes are worth knowing. The city's new pied-à-terre surcharge, effective July 1, 2026, applies to high-value one-to-three family homes and apartments that are not the owner's primary residence, with an exemption for units leased for a year or more to a city primary resident, so a rental acquired as replacement property can qualify for the exemption while a vacant investment unit does not. And the state's expanded rent-stabilization and good-cause rules, covered next, bear directly on the income the city will capitalize.

Co-ops, condos, and what counts as real property

New York has an asset class most states do not: the cooperative apartment, owned through shares in a housing corporation and a proprietary lease rather than a deed. The IRS has concluded in private letter rulings, most notably PLR 200631012, that New York co-op interests are like-kind to fee interests in real estate, reasoning from the several New York statutes that treat co-op shares as real property for lien, tax, and recording purposes. A co-op held as a rental can be relinquished into any real estate, and a rental co-op can be acquired as replacement property. The complications are practical: many boards prohibit or restrict investor owners and sublets, board approval timelines are long and unpredictable against a 180-day clock, and the co-op's own transfer fee, the so-called flip tax, is a private charge of one to three percent that comes out of the seller's proceeds. Co-op sellers who are nonresidents file Form IT-2664 rather than IT-2663, with the same box-4B treatment. Condominiums are fee simple and present none of these issues. Private rulings are not precedent, so a co-op exchange should carry an opinion of counsel.

Rent regulation and the city multifamily exchange

Roughly forty percent of the city's rental apartments are rent stabilized, and the 2019 Housing Stability and Tenant Protection Act ended most of the mechanisms by which owners had moved units to market: vacancy decontrol, the vacancy bonus, and uncapped individual apartment improvements. The 2024 budget loosened the improvement cap, now $30,000 over fifteen years, or $50,000 for units that were long vacant or long occupied, and Good Cause Eviction applies automatically in the city and by opt-in elsewhere, limiting rent increases on most unregulated units to the lesser of 10% or inflation plus five points, with exemptions for small portfolios, newer buildings, and high-rent units. The investment result is that stabilized buildings trade at a steep discount to their 2018 values and at thin volumes, and the income the city capitalizes for assessment reflects the constrained rents. For an exchanger, a stabilized building can be replacement property like any other, but the underwriting is a regulatory exercise as much as a real estate one, and the buyer's plan for the units is the central question. An exchange from a stabilized Bronx walk-up into a free-market Sun Belt asset has been one of the most common New York exchanges of the past five years; the reverse is rare.

The New York market: what exchangers trade

The city exchange market is bifurcated: free-market multifamily, net-lease retail, and industrial in the outer boroughs trade on fundamentals, while stabilized multifamily trades on regulatory expectations. Office remains in a slow conversion cycle, with older Class B buildings moving toward residential use under the 2024 incentive program and exchangers mostly avoiding the asset class. Long Island and Westchester are suburban multifamily, medical office, and industrial markets with their own transfer taxes layered on the state's. Upstate has become a genuine destination for exchange capital for the first time in a generation: the semiconductor fabrication complex outside Syracuse, with its first fab under construction in 2026 and supplier parks forming around it, has pulled industrial and housing investment into Onondaga County, while Buffalo and Rochester offer multifamily at yields unavailable downstate. The Hudson Valley and Catskills short-term rental market has matured under a 2025 state law that requires STR operators to register with the Tax Department and collect occupancy taxes, and under a patchwork of town regulations that an exchanger must verify before closing on a property underwritten as an STR.

Nonresident owners and the estate-tax cliff

Investors from elsewhere who exchange into New York property acquire more than an income-tax filing requirement. New York imposes an estate tax on the New York real and tangible property of nonresidents, with a basic exclusion of $7.35 million for 2026. The exclusion has a cliff: once the taxable estate exceeds 105% of the exclusion, the entire exclusion is lost and the whole estate is taxed, at rates reaching 16%. A nonresident whose New York building is the only New York asset is measured against the exclusion on the whole federal gross estate, not just the New York portion, so a $3 million New York replacement property owned by someone with a $9 million estate can produce a New York estate tax bill. Holding New York real estate through an entity can change its character for this purpose, and nonresident investors exchanging into the state should have the structure reviewed before the 45th day. Residents face the same tax on everything they own, and the same cliff.

Finding a qualified intermediary in New York

New York does not license or regulate exchange facilitators, despite the volume of exchanges that pass through the state; the states that do include California, Colorado, Nevada, Oregon, Washington, Virginia, and Maine. The safeguards are those in your exchange agreement and the intermediary's practices, so the national checklist in our QI guide governs: fidelity bond and errors-and-omissions coverage, qualified escrow or trust accounts, segregation under your taxpayer identification number, dual-signature release, and a parent with a balance sheet. New York's exchange market is served by the national intermediaries, by title-company affiliates, and by a cohort of attorney-owned facilitators; an attorney who represents you in the transaction cannot also be your intermediary under the disqualified-person rules. Price them against our fee comparison and remember that the intermediary's fee will be the smallest tax-related line on a New York settlement statement.

A New York worked example

Same property as the calculator's standard example, relocated to Queens; assumptions per our methodology, with the owner assumed to be a city resident in the 6.85% state bracket. Transfer taxes are paid in both columns and reduce the exchange proceeds. The exchange keeps about $302,000 working; the state and city share is roughly 29% of it.