As shared in July, Pennsylvania will finally recognize 1031 exchanges. Pennsylvania residents selling property in or out of the Commonwealth and non-residents selling property in Pennsylvania will not only be able to defer federal gain, but they will also be able to defer Pennsylvania income tax on exchanges initiated after January 1, 2023.

We have had many questions since the announcement. The following are a few FAQs:

FAQs: Pennsylvania to Recognize 1031

The new law goes into effect on January 1, 2023. What must happen after that date?

Exchanges initiated after January 1, 2023, by transferring title of the relinquished property to a buyer will be eligible for 1031 tax-deferral treatment in Pennsylvania.

If I sold my relinquished property in 2022 but do not acquire my replacement property until 2023, can I defer the Pennsylvania income tax?

Unfortunately, this transaction will not be eligible for 1031 treatment in Pennsylvania. The relinquished property must be transferred to the buyer in 2023 to defer the Pennsylvania income tax.

If I completed a 1031 exchange a few years ago, can I now file for a refund of the income tax I paid to Pennsylvania?

Pennsylvania’s recognition of 1031 like-kind exchanges are not retroactive. Only exchanges initiated after January 1, 2023 will qualify for tax-deferral treatment.

Is there special paperwork that must be completed at my closing for my 1031 exchange?

There is no paperwork to be completed at your closings. You will report your 1031 exchanges when filing your Pennsylvania tax return.

To qualify for tax-deferral in Pennsylvania, must I buy a replacement property in Pennsylvania?

The are no restrictions on where you can purchase replacement property in a 1031 exchange provided it is in the U.S.

Will Pennsylvania put out their own 1031 exchange regulations?

The Pennsylvania bill that allows recognition of 1031 exchanges stated the Commonwealth will follow the federal code. Therefore, no further regulation is expected.

If a replacement property is parked in a reverse exchange and transferred to an Exchanger after January 1, 2023, will that work for 1031 treatment?

Tax-deferral treatment is only eligible if the relinquished property is transferred to a parked replacement property transferred to the Exchanger. If the relinquished property is transferred to a buyer after January 1, 2023, the exchange will qualify for tax-deferred treatment in Pennsylvania.

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