Bill
SB 461
NC allows deduction of boot from 1031 exchanges, up to the seller's basis, cutting state tax for individuals and entities starting 2025.
Status and timing
- Introduced: February 19, 2025
- Passed 1st reading: March 25, 2025 (per bill packet)
- Effective date: Applies to taxable years beginning on or after January 1, 2025 (Section 3)
Purpose and intent
- The bill changes how North Carolina treats certain gain recognized on IRC §1031 exchanges (commonly used for deferral of gain on like‑kind real property exchanges). Specifically, it treats some amounts that are included in federal taxable income as a result of a §1031 exchange (“non‑like‑kind property” or “boot”) as deductible for North Carolina tax purposes, up to the taxpayer’s basis in the property sold. The intent is to align or partially conform state tax treatment with taxpayers’ economic basis limits in these transactions, thereby reducing state taxable income for certain exchange transactions.
Key provisions
- Adds parallel deductions to two North Carolina tax code provisions:
- Section 1 amends G.S. 105‑130.5(b) (statutory list of deductions from federal taxable income used to compute State net income) to include:
- “Any amount included in federal taxable income as non‑like‑kind property received in an exchange under section 1031 of the Code to the extent it does not exceed the taxpayer's basis in the property sold.”
- Section 2 amends G.S. 105‑153.5(b) (other deductions for individual taxpayers) to include the same language.
- Net effect: For both corporate (state net income) and individual NC taxpayers, federal inclusion of boot from a §1031 exchange can be deducted on the North Carolina return — but only up to the seller’s basis in the relinquished property.
Who is affected
- Real‑estate investors and other taxpayers (individuals and entities) who use IRC §1031 exchanges and receive non‑like‑kind property (“boot”) as part of the exchange.
- Tax preparers and tax administrators will need to apply the new deduction rule when preparing/computing North Carolina taxable income for affected tax years.
Practical effect and fiscal considerations
- The provision reduces North Carolina taxable income for taxpayers who recognize boot on §1031 exchanges — limited by the taxpayer’s basis — and therefore can reduce state income tax liability for those taxpayers.
- The bill does not quantify state revenue effects; the magnitude depends on how many §1031 exchanges occur and the amounts of boot recognized that exceed or fall within basis limits. Implementation may require guidance from the Department of Revenue on how to document basis and apply the limitation.
Statutory changes (by citation)
- Amends G.S. 105‑130.5(b) and G.S. 105‑153.5(b). Section 3 sets the effective tax year (on or after 1/1/2025).
Summary
- SB 461 permits North Carolina taxpayers (individuals and entities) to deduct at the state level certain federal inclusions of non‑like‑kind property from §1031 exchanges — limited to the taxpayer’s basis in the property sold — thereby potentially reducing state taxable income arising from those exchange transactions for tax years beginning 2025 onward.
Compiled from official sources — confirm details with the bill’s official record.
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