Pennsylvania Advisory

Deferral of State Income

A 1031 exchange is allowed under Section 1031 of the Internal Revenue Code and allows the deferral of FEDERAL gain. Many states also have similar laws that allow a 1031 exchange to defer the state gain or income tax.

Pennsylvania and Like-Kind Exchanges

Except for c-corporations, Pennsylvania law does not contain a provision similar to IRC §1031, therefore property exchanges resulting in gain or income are generally subject to Pennsylvania tax. However, the PA Department of Revenue has determined that gain or loss on like-kind exchanges does not have to be recognized at the time of the exchange if the Taxpayer's method of accounting allows deferral of gain. A Taxpayer must use the method of accounting that allows the deferral of gain on a consistent basis, and the method must clearly reflect the Taxpayer's income. In addition, a Taxpayer may not change his or her method of accounting just to obtain a tax benefit for a particular transaction, and the deferral of gain or income with respect to like-kind exchanges will remain the exception rather than the rule. [Pennsylvania Personal Income Tax Bulletin No. 2006-07, 10/20/2006.]

Efforts to Bring Like-Kind Exchanges to Pennsylvania

March 2015:  PA State Senator Mike Folmer Introduces SB 601 Small Business Reform Package to bring like-kind exchanges to Pennsylvania. The Bill passed the Senate Finance Committee and was referred to the Appropriations Committee in April 2016.

March 2015:  PA State Rep. Steve Bloom Introduces HB 700 Small Business Tax Fairness Package (Previously HB 2400, HB 2401 & HB 2402)  to bring like-kind exchanges to Pennsylvania. The Bill has been referred to the House Finance Committee.

February 2013:  Gov. Tom Corbett’s budget proposal to create a Pennsylvania version of a like-kind exchanges.