Tax Dynamics, Migration, and 1031 Exchanges Are Reshaping Real Estate Investment

Americans were on the move in 2024, continuing a trend of choosing low-tax states over high-tax ones. Those decisions about where to go and where to leave are changing real estate markets across the country.

Over the last few years, states with favorable tax environments and lower costs of living have seen population inflows, while high-cost states continue to lose residents, creating both challenges and opportunities for investors, particularly when combined with a 1031 exchange.

Where Residents are Headed

The US Census Bureau’s most recent interstate migration estimates show interstate moves that happened from July 1, 2023, and June 30, 2024. For the second year in a row, South Carolina saw the greatest population growth attributable to net inbound domestic migration.

Some other states that also witnessed domestic migration-related population growth were Idaho, Delaware, North Carolina and Tennessee. Nevada and Alabama also featured in the top 10 based on census population data.

Favorable climates, growing job markets and lighter tax burdens were noted as major attraction factors. According to the National Association of REALTORS, 16% of residential moves are motivated by more favorable taxes, often more prominent in the South.

Hawaii lost the greatest share of its population to other states, and just behind it were New York and California, followed by Alaska and Illinois. California alone lost more than 259,000 residents in 2023, with high housing costs combined with state income taxes weighing heavily on both families and investors.

The Tax Advantage

Tax advantages have become more of a deciding factor in investment moves, including relocations. States like Texas, Florida, Tennessee, and Nevada, for example, don’t have a state income tax and have seen an influx of demand.

For investors exiting higher tax states, such as California or New York, the challenge is how to manage the potential capital gains or tax liability that comes with selling a property that has gone up in value.

This is where the 1031 Exchange becomes a powerful tool. Investors often sell property in one state and purchase real estate in another state – whether to achieve greater portfolio diversification, increase the power of their dollar, or move investments to their state of residence. Whatever the reason for the investor’s shift, a tax-deferred 1031 exchange can help because real estate located in one U.S. state is considered “like-kind” to real estate located in any other state for exchange purposes.

In most cases, exchanging out of state allows a taxpayer to defer both state and federal income taxes (assuming the state has income taxes). However, taxpayers considering an exchange should always consult with their tax advisor regarding the state-specific nuances to the recognition of tax-deferred exchanges that may apply.

A Nuanced Local Reality with a Few Strategic Paths

Although migration trends can show a high-level view of what is happening, the reality is more nuanced. Even within states that are experiencing population loss, some submarkets in those states are remaining strong. Take California as an example. Despite the state’s well documented “exodus,” with areas like the Bay Area having the most challenges, there are pockets and regions of strength within the state. The Inland Empire, San Diego, and Sacramento, for example, have seen increased demand, and certain sectors in the state, such as industrial and multifamily properties that are in supply-constrained areas have shown resilience and are continuing to hold their value.

For investors, there are a few strategic paths depending on their personal and geographic preferences. For example, those who are ready to cross state lines, such as selling a California multifamily property and reinvesting in a North Carolina apartment community, can use a 1031 exchange to help move capital from the outbound state to one with a growing population that is tax friendly. On the other hand, investors can also rebalance in the state when it might not be practical or desirable by using a 1031 to shift capital away from underperforming assets and toward stronger submarkets. Both approaches offer the investor the flexibility to adjust without the immediate tax burden.

What Success Looks Like and How to Plan for it

When looking at taxation, migration and other market fundamentals, there are many moves for investors to consider. After studying the data, understanding hyperlocal dynamics and national trends, they can identify specific metros and submarkets that may better align with their end goal. Beyond that, they can define their portfolio objectives and decide whether in-state versus cross-state diversification fits those long-term goals.

Whether you’re exchanging from one state to another domestically, or within the same state, success depends on leveraging experts and consulting with your tax advisor to understand what requirements you may need to keep in mind in order to complete a successful exchange transaction.