August 18, 2022

Pennsylvania to Recognize Section 1031 Exchange Tax Deferral

By Zachary Buehler, CPA, Manager, Tax & Business Services

Pennsylvania to Recognize Section 1031 Exchange Tax Deferral State & Local Tax

On July 8, 2022, Pennsylvania Governor Tom Wolf signed House Bill 1342 into law, providing Pennsylvania taxpayers with a tax benefit provided by many other states in conformance with federal law.

Within the bill is a provision that will conform Pennsylvania’s state tax treatment of like-kind exchanges to Section 1031 of the Federal Internal Revenue Code (“IRC”) for tax years beginning after December 31, 2022. Pennsylvania becomes one of the last states to conform to Section 1031 of the IRC.

The IRC currently allows taxpayers to defer federal income taxes on capital gains under Section 1031 if the proceeds are re-invested in similar property as part of the qualifying like-kind exchange. Pennsylvania has long been one of the few states that did not recognize 1031 exchanges, disallowing taxpayers to defer Pennsylvania state income tax on capital gains.

Historically, for Pennsylvania income tax purposes, a gain resulting from like-kind exchanges of property that occur within the Commonwealth are generally subject to personal income tax at the time of the sale. Moreover, the income tax owed to the Commonwealth could not be paid from proceeds of the sale without triggering federal tax. Pennsylvania resident and non-resident property owners can now breathe a sigh of relief.

Tax deferrals under Section 1031 in Pennsylvania are effective on exchanges initiated on or after January 1, 2023. Exchanges initiated before that date are not eligible for this treatment.

For questions concerning how this legislation may affect you, do not hesitate to contact your Marcum tax professional.