Kentucky taxes capital gains as ordinary income — up to 3.5% — stacked on top of federal tax, so selling appreciated real estate can cost roughly ~27.3% of the gain. A 1031 exchange into a Delaware Statutory Trust lets Kentucky investors defer that combined bill and trade active landlording for passive institutional real estate.
The Kentucky tax math
Here's the tax stack on a long-held rental sold for a $1.5M gain (excludes depreciation recapture, taxed separately at up to 25%):
| On a $1.5M gain | Tax |
|---|---|
| Federal long-term capital gains (20%) | $300,000 |
| Net investment income tax (3.8%) | $57,000 |
| Kentucky income tax (3.5%) | $52,500 |
| Total if you simply sell | $409,500 |
| Tax if you 1031 into a DST | $0 deferred |
In Kentucky's top bracket, roughly the combined rate above goes to tax if you sell outright — versus $0 now with a qualifying 1031 exchange. Run your Kentucky numbers →
Kentucky 1031 rules
Rules summarized as of 2026 — verify with your tax advisor.
Conforms to federal §1031
Kentucky conforms to IRC §1031, so a qualifying exchange defers Kentucky tax as well as federal tax.
Withholding at sale
Kentucky may require nonresident withholding at closing; a qualifying 1031 exchange generally defers it. Confirm specifics with your closing agent.
How gains are taxed
Taxed as ordinary income — up to 3.5%.
Kentucky market snapshot
Illustrative — wire to a market-data feed; refreshed quarterly.
Baker 1031 in Kentucky
Realized (acquired, held, sold) programs on Kentucky assets. Joined from full-cycle-deals.csv; sponsor-reported, net-to-investor, not independently verified; past performance ≠ future results.
| Program | Sponsor | Avg annual | Equity × | Hold |
|---|---|---|---|---|
| Applebee's — Crestview Hills | AEI | 9.35% | 1.87x | 9.39 yr |
| Legends at Indian Springs — Louisville | Passco | 12.80% | 2.06x | 6 yr |
| Veranda at Norton Commons — Prospect | Passco | 14.64% | 2.27x | 6 yr |
See every Kentucky deal in the Data Center →
Current offerings for Kentucky investors
| Offering | Sponsor | Type | Status |
|---|---|---|---|
| Blue Owl Real Estate Exchange V DST | Blue Owl | Industrial | Coming Soon / Under Review |
| FSX Industrial 34, DST | Four Springs Capital | Industrial | Available |
| Passco Riverside DST | Passco | Multifamily | Available |
Learn more
Kentucky FAQ
What is the capital gains tax rate in Kentucky?
Kentucky taxes capital gains as ordinary income, up to 3.5%, with no separate long-term rate. Combined with the federal 20% rate and the 3.8% net investment income tax, a high-bracket Kentucky seller can face roughly ~27.3% on a real estate gain.
Does Kentucky recognize 1031 exchanges?
Yes. Kentucky conforms to IRC §1031, so a properly structured exchange defers Kentucky tax as well as federal tax.
Why use a 1031 exchange in Kentucky?
To defer the tax on a large gain (up to about ~27.3% combined) and move from active landlording into passive, professionally managed real estate while keeping your full equity invested. These are Regulation D offerings for accredited investors.
Disclosures
This page is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. State tax and 1031 rules summarized here are general, current as of 2026, and not tax advice — verify with your CPA and attorney. For accredited investors only. Representatives may transact business only in states where registered or exempt. Securities offered through Aurora Securities, Inc., member FINRA/SIPC; Baker 1031 Investments, LLC is independent of Aurora. Performance shown is sponsor-reported, realized programs only, net of fees, not independently verified, and not indicative of future results.