A 1031 exchange is allowed under Section 1031 of the Internal Revenue Code and allows the deferral of FEDERAL gain. Except for Pennsylvania, all states with an income tax regime follow the federal tax code or have adopted their own version of Section 1031.
Except for c-corporations, Pennsylvania law does not contain a provision similar to IRC §1031. Therefore property exchanges resulting in gain or income are subject to Pennsylvania tax. Income tax is due from residents of Pennsylvania regardless of where the property is located and non-residents selling property located in Pennsylvania.
Effective January 1, 2023, Pennsylvania will recognize 1031 exchanges. House Bill 1342 was signed by Governor Tom Wolf on July, 8, 2022 and codified the tax deferral benefit of like-kind exchanges beginning in the 2023 tax year. Pennsylvania income tax will be due on exchanges initiated in 2022.