Pennsylvania Version of a 1031 Exchange
May be Coming Soon
Pennsylvania Gov. Tom Corbett recently released his budget for the next fiscal year and it included many broad-based business tax reform initiatives that could improve Pennsylvania's standing as a place to do business and spur economic growth. Also included was a proposal that had everyone at 1031 CORP. pretty excited – a Pennsylvania version of a 1031 exchange! PA has long been one of the few states that does not recognize 1031 exchanges or have a similar provision to allow the deferral of state income tax on the exchange of assets held for business use or investment.
As you know, a 1031 exchange is a strategy allowed under Internal Revenue Code Section 1031. It allows Taxpayers to defer the federal gain on the “exchange” of an asset held for business use or investment. It involves the sale of a relinquished property followed by the acquisition of a replacement property from an unrelated party within a 180-Day Exchange Period. Both transactions are linked together by a Qualified Intermediary (QI), such as 1031 CORP., and pertinent exchange documents. Any asset held for business use or investment can qualify but like-kind replacement property must be acquired. For example, investment real estate can be exchanged for other real estate to be held for business use or investment. You can also exchange farm equipment for other farm equipment.
Currently, income tax is due to the Commonwealth of Pennsylvania for residents who complete a 1031 exchange and non-residents who exchange property that was located in Pennsylvania. There are a few exceptions (c-corps and when certain reporting methods are used) but in almost all situations, the tax is due. While we are fortunate that Pennsylvania income tax rates are lower than many other states, having this additional 3.07% to reinvest is great news for Pennsylvania exchangers!
Gov. Corbett stated that he expects this new like-kind exchange to be revenue neutral for the first three years and a loss of $66 Million in tax revenue the following two years.
A PA like-kind exchange provision is a win-win for the Commonwealth, its taxpayers and businesses as well as those completing 1031 exchanges. Just some of the many benefits
For the Commonwealth and its Taxpayers:
- JOBS! 1031 Exchanges help preserve and create jobs. Real estate professionals, lenders, closing officers, inspectors, attorneys, accountants and Qualified Intermediaries are just some of the parties involved in a 1031 exchange and its tax reporting. Once the replacement property is acquired, new owners usually do some work creating jobs for contractors, painters, suppliers, architects, landscapers, plumbers, electricians and lenders.
- Keeps the economy moving forward. Rather than sitting on a property that no longer fits their needs but don’t want to sell because of the taxes, investors use an exchange to acquire something new – often trading up in property value.
- Helps businesses grow which ultimately increases the taxes paid to the Commonwealth.
- Keeps taxpayers and businesses in the Commonwealth rather than changing their primary residence or headquarters to another state to take advantage of their like-kind exchange provision.
- Keep equity invested in real estate or other assets held for business use or investment
- Opportunity to trade up into a property that would be otherwise unobtainable
- Ability to diversify the type of property or location
- Opportunity to create greater cash flow
- Helps create an income stream during retirement
For Business Owners and Farmers:
- Opportunity to relocate to better location or expand into multiple locations
- Ability to exchange older equipment for more efficient new equipment
- Creates an exit strategy for business owners
- Allows franchisees to trade up to more valuable franchises
1031 CORP. will keep you posted as we hear more but in the meantime, reach out to your state representatives and senators and let them know you support this initiative. Let them know how you or your clients have benefitted from a 1031 exchange.