Do I Have to Pay NH State Taxes on My 1031 Exchange?

Starting in late 2008 the New Hampshire Department of Revenue Administration began billing certain tax payers in the state a business profits tax on 1031 Exchanges they had conducted in the past, up to five years prior. A 1031 (Ten Thirty One) Exchange is a federal tax law, which allows tax payers to sell one real estate asset and purchase a new asset, and defer any capital gains taxes on the sale. To accomplish this deferment certain steps must be taken, anyone conducting an exchange should seek professional involvement. The goal is to defer all of your state and federal takes so that a tax payer can reinvest their gains back into a new property.

But the State of NH claimed that exchangors would have to pay 8.5% business profits tax on certain types of exchanges, retroactively for five years. NH was to be only one of two states in which local 1031 Exchange law differed with federal law.

Let us fast forward from 2008, when 20 of these DRA billings were reported, to 2010 when the New Hampshire State Congress became involved to clear up the issue for tax payers who may have conducted an exchange from 2004 up until present day.

Senate Bill 483, in March, was one such piece of involvement which said, among other things:

“The department of revenue administration shall recognize any like-kind exchange that qualifies under the provisions of Internal Revenue Code section 1031, United States Department of the Treasury Income Tax Regulations, or pronouncements issued by the Internal Revenue Service relating to likekind exchanges.”

In other words… “if it works for the IRS, it works for the Granite State”. In May an updated version of the Bill has passed the House Ways and Means Committee, which then need to be signed into law by our Governor. The House report on the above bill, passing 18-2 in committee said that the bill should allow tax payers to gain under the business profits tax the same way they are allowed to do under Federal Code.” As of July 9, the bill has been signed by Governor Lynch, clearing up the issue immediately and post dated to when things started.

This issue is not yet resolved but the take away’s are clear: 1) Be aware of all tax implications of any real estate transaction you perform and account for “rule change” risk such as this when making decisions and consult trusted experts… 2) Become involved when there is an issue, bill or ruling that affects your properties.

- Chris Norwood