Taxpayers can now exchange like-kind property in the Keystone State, with recognized deferment on Pennsylvania state income taxes. The new law recognizing Section 1031 for state capital gains taxes took effect on January 1, 2023.
This long-awaited change levels the playing field for Pennsylvania taxpayers and non-residents with property in Pennsylvania. Pennsylvania residents will see greater ability to improve business resilience, diversify investments, build wealth, maximize their buying power, and benefit from greater mobility in real estate. The new law paves the way for more commercial development from non-resident investors. Exchange property owners can now make better use of their continuous investment in real estate.
The state government will reap new economic benefits from like-kind exchanges, such as greater capital investment in local economies, job growth, communities with repurposed real estate and improved properties, and the tax revenue generated by economic activity from the use of like-kind exchanges.
The language and application of the Pennsylvania law, codified in PA Act 53, matches the federal Internal Revenue Code, making for seamless application. Any excess exchange funds taken as gain are taxed. Contact the Exchange Team at 1031 CORP. for help with this transition.
Previously, residents of Pennsylvania or non-residents selling property located in Pennsylvania could defer the federal gain but not the Pennsylvania income tax. To make matters worse, Pennsylvania income tax was paid out-of-pocket; 1031 exchange funds could not be used without triggering federal capital gains.
Exchanges qualify under the law if the relinquished property that began the exchange closed after January 1, 2023. Unfortunately, the Pennsylvania income tax will be due on all exchanges initiated in 2022 regardless of when the replacement property is acquired.