A structural shift is underway in American real estate investment. Driven by escalating tax pressure in high-burden coastal jurisdictions and amplified by the mechanics of Section 1031 exchanges and an extension of bonus depreciation rules with the One Big Beautiful Bill Act (OBBBA), capital is migrating at scale into landlord-friendly, low-tax markets across the Southeast and broader middle America.
New York State leads the charge when it comes to net-negative capital migration, following the commencement of a new mayoral regime that is highly focused on retributing wealth and revolutionizing housing policy using policy and methods that many interpret as a threat to their after-tax income and a drag on their assets owned in the state.
The Coastal Tax Environment: New York at the Epicenter
New York State and New York City together impose one of the most punishing tax regimes on high earners in the developed world. As of 2025, the top state income tax bracket sits at 10.9%, with New York City layering on an additional rate of up to 3.876%. Combined, top earners in the five boroughs face a state-plus-local marginal rate of approximately 14.8% before federal obligations begin.
Proposed legislation by Mayor Zohran Mamdani would add a further 2% surcharge on incomes above $1M, raising the combined city-and-state top rate to 16.776%, making it the highest in the nation. Add federal obligations and the total burden approaches 54%.
| $111B Net AGI Lost by NY (Decade, Highest in USA) IRS Migration Data, 2011–2021 | $196B Net AGI Gained by Florida (Decade) National Taxpayers Union Foundation | 5,000+ NY Millionaires Who Changed State Address Since 2020 NY Dept. of Taxation & Finance |
IRS migration data tells a consistent story across multiple years. In the most recent single-year data available:
- New York lost $9.9B in net adjusted gross income in a single year to interstate migration.
- Florida gained $20.6B in net AGI that same year, making it by far the nation’s largest recipient of incoming wealth.
- Florida gained approximately 29,771 affluent taxpayers (earning $200,000+) on a net basis, increasing its combined high-earner AGI by $28.7B.
In 2025, a bill co-sponsored by 24 state senators and 27 assembly members proposed more than doubling the state’s top income tax rate, with new brackets starting at $500,000. A separate measure would raise the top NYC income tax rate by 51%.
From fiscal 2010 through fiscal 2025, New York’s personal income tax revenues grew by nearly $43B, while all other tax categories combined grew by just $13.6B. The state has, in effect, bet its fiscal future on the willingness of a small number of highly mobile individuals to remain indefinitely.
A Popular Solution: 1031 Exchanges and Florida Real Estate
1031 Mechanics
Under Section 1031, a real estate investor who sells an investment property may defer all federal, and most state, capital gains tax by reinvesting the proceeds into a like-kind replacement property. The key rules:
- The investor must identify replacement property within 45 days of the sale closing.
- The exchange must be completed (replacement property closed) within 180 days.
- A Qualified Intermediary must hold the proceeds (the investor cannot touch the funds).
- The replacement property must be of equal or greater value to fully defer all gain.
2025 delivered critical regulatory clarity for 1031 investors. The OBBBA, signed into law in July 2025, permanently preserved Section 1031 legislation in its current form. Additionally, the OBBBA reinstated 100% bonus depreciation permanently, a major tax advantage for investors acquiring physical assets like retail properties and reinvesting in improvements.
62% of rental property buyers surveyed in 2025 plan to use a 1031 Exchange to defer taxes and maximize reinvestment. The exchange is no longer a niche strategy; it is standard practice for real estate portfolios.
New York State follows federal 1031 rules, with one important nuance: when a nonresident sells New York real property, they must file Form IT-2663 to claim the withholding exemption. This makes a New York-to-Florida exchange particularly clean from a state tax perspective.
In June 2025, New York’s Division of Tax Appeals approved “drop-and-swap” transactions for 1031 purposes, giving partnerships additional flexibility to structure exchanges at closing. This ruling removed a meaningful compliance uncertainty that had deterred some partnership-held transactions.
Florida Necessity Retail: The Preferred Landing Zone
For the HNW investor executing a 1031 exchange out of a coastal market, the ideal replacement asset combines three qualities: passive income with minimal landlord obligations, a resilient tenant base immune to economic cycles, and a favorable regulatory and tax environment. Florida necessity retail, specifically NNN-leased properties anchored by essential services tenants, satisfies all three.
Florida carries no state income tax, no estate tax, and imposes no capital gains tax at the state level. For a New York investor who successfully relocates their domicile alongside their investment, the ongoing income from a NNN Florida property is never subjected to the current 14.8% combined NY tax burden that would apply to the same dollars earned while maintaining NY residency.
For 1031 exchange investors completing $3–10M transactions, the current NNN FL market offers a rare combination: above-average cap rates, investment-grade tenants, long lease terms, and a state-level tax status that amplifies after-tax returns.
The state’s population growth, while moderating from its pandemic-era peak, remains structurally positive. Florida led the nation in net international migration in the twelve months through June 2025, gaining 178,674 new residents through that channel alone. The broader consumer base supporting necessity retail (groceries, pharmacies, quick-service restaurants, auto services, dollar stores, convenience stores) is stable and expanding.
Conclusion
The evidence is unambiguous. Over the past decade, $111B in adjusted gross income left New York State through interstate migration, while Florida absorbed $196B of incoming wealth. In the most recent annual IRS data, New York lost $9.9B in a single year while Florida gained $20.6B. New York-based investors are now the single largest source of inbound capital into Southeast real estate markets.
This is not a temporary dislocation. It is a structural realignment driven by the mathematics of after-tax returns, the widening gap between coastal tax burdens and Sun Belt alternatives, and the growing awareness among HNW investors that geography is itself a tax strategy. Proposed legislation in Albany and City Hall would accelerate this trend further.
The 1031 Like-Kind Exchange, preserved in full under current federal law and supported by a growing body of state-level regulatory clarity, is the premier instrument for executing this transition. Paired with Florida necessity retail properties anchored by investment-grade, essential-services tenants, it offers investors the opportunity to:
- Fully defer capital gains on appreciated coastal real estate
- Redeploy pre-tax dollars into a higher-yield, lower-risk asset class
- Eliminate active management obligations through NNN lease structures
- Benefit from long-term demographic and consumer tailwinds in a no-income-tax state
- Compound wealth across generations through stepped-up basis at death
In an era of escalating coastal tax policy, the 1031 exchange is not merely a tax deferral tool. It is a capital preservation mandate. The investors who act now (before cap rate compression accelerates and before additional tax proposals become law) will look back on this window as precisely the moment the opportunity was clearest.
SAB Capital’s 1031 desk has operated with this tax-advantaged expertise for over a decade, serving as experts in an ever-evolving market. We don’t believe in pushing deals, we believe in understanding them and serving the needs of our clients to achieve their investment and capital preservation goals. At the end of the day, the market doesn’t pay for what something is, it pays for what it solves.
If you’re interested in understanding how your tenancy is valued in this evolving interest rate environment and how it can be used more effectively to accomplish your investment or portfolio management goals, please reach out to our transaction professionals.
