1031 Exchange in Pennsylvania
Pennsylvania aligned with federal 1031 exchange rules through Act 53 of 2022 (House Bill 1342), signed into law in July 2022. For tax years beginning after December 31, 2022, gain deferred under IRC Section 1031 for federal purposes is also deferred for Pennsylvania personal income tax, which is a flat 3.07%. Note that Pennsylvania realty transfer tax still applies to each transfer in an exchange and cannot be deferred.
Fast Facts
- State Capital Gains Rate
- 3.07% (flat personal income tax rate). Pennsylvania taxes capital gains at its flat 3.07% personal income tax rate. Under Act 53 of 2022, gain deferred federally under IRC Section 1031 is also deferred for Pennsylvania personal income tax.
- Conforms to Federal 1031
- Yes, for tax years beginning after December 31, 2022. Per the Pennsylvania Department of Revenue, deferral of tax on gains from like-kind exchanges is allowed effective January 1, 2023, when the gain is deferred for federal purposes under IRC Section 1031.
- Additional Transfer Tax
- 1% state realty transfer tax plus local transfer taxes, which are NOT deferred by a 1031 exchange. Most municipalities add about 1% locally (roughly 2% combined), but rates are much higher in some cities: Philadelphia's combined rate is 4.578% (3.578% city + 1% state, effective July 1, 2025) and Pittsburgh's is 5% (3% city + 1% school district + 1% state).
- Local Deadlines/Forms
- Follows federal guidelines: 45 days for identification and 180 days for completion. Taxable gains from property dispositions are reported on PA-40 Schedule D; keep federal Form 8824 with your records. (PA Schedule D-1 / REV-1689 is only for installment sales, not like-kind exchanges.)
- Qualified Intermediary Requirements
- No Pennsylvania-specific QI licensing or registration regime. Pennsylvania follows the federal qualified intermediary rules under Treasury Regulation 1.1031(k)-1 without additional state requirements.
Legislative Updates
House Bill 1342 (Act 53 of 2022): 1031 Exchange State Conformity
Act 53 of 2022 conforms Pennsylvania's Personal Income Tax law to federal IRC Section 1031, providing for deferral of gain in like-kind exchanges. Per Pennsylvania Department of Revenue guidance, the change applies to tax years beginning after December 31, 2022; Pennsylvania gain is deferred when the gain is deferred for federal income tax purposes.
Legal and Tax Considerations
State Capital Gains Rate
3.07% (flat personal income tax rate). Pennsylvania taxes capital gains at its flat 3.07% personal income tax rate. Under Act 53 of 2022, gain deferred federally under IRC Section 1031 is also deferred for Pennsylvania personal income tax.
Conforms to Federal 1031
Yes, for tax years beginning after December 31, 2022. Per the Pennsylvania Department of Revenue, deferral of tax on gains from like-kind exchanges is allowed effective January 1, 2023, when the gain is deferred for federal purposes under IRC Section 1031.
Additional Transfer Tax
1% state realty transfer tax plus local transfer taxes, which are NOT deferred by a 1031 exchange. Most municipalities add about 1% locally (roughly 2% combined), but rates are much higher in some cities: Philadelphia's combined rate is 4.578% (effective July 1, 2025) and Pittsburgh's is 5%.
Local Deadlines/Forms
Follows federal guidelines: 45 days for identification and 180 days for completion. Taxable gains from property dispositions are reported on PA-40 Schedule D; keep federal Form 8824 with your records. (PA Schedule D-1 / REV-1689 is only for installment sales, not like-kind exchanges.)
Qualified Intermediary Requirements
No Pennsylvania-specific QI licensing or registration regime. Pennsylvania follows the federal qualified intermediary rules under Treasury Regulation 1.1031(k)-1 without additional state requirements.
Required Documentation
- Federal Form 8824 (Like-Kind Exchanges)
- PA-40 Schedule D (for any taxable gain, e.g., boot or a failed exchange)
- Complete closing statements for both properties
Clawback Rule
None
Step-by-Step Process
- 1
Engage a Qualified Intermediary Before Closing
Work with a qualified intermediary to handle the exchange funds and documentation. The QI must be in place before you close on the sale of your relinquished property — you cannot take receipt of the sale proceeds.
- 2
Identify Replacement Property
You must identify potential replacement properties in writing within 45 days of selling your relinquished property. In Pennsylvania, factor local transfer taxes, property taxes, and zoning into your shortlist.
- 3
Close on Replacement Property
Complete the purchase of your replacement property within 180 days of selling your relinquished property (or by your tax return due date, including extensions, if earlier).
- 4
Pay Realty Transfer Tax at Each Closing
Pennsylvania's 1% state realty transfer tax plus applicable local transfer taxes are due on each deed transfer in the exchange. These taxes are not deferred by a 1031 exchange.
- 5
File Tax Returns
Report the exchange on your federal return using Form 8824. For Pennsylvania, gain deferred federally under Section 1031 is also deferred for personal income tax (tax years beginning after December 31, 2022); report any taxable gain, such as boot, on PA-40 Schedule D.
- 6
Review Property Tax Assessments
Pennsylvania property tax rates and assessment practices vary by county and school district. Review the replacement property's assessment during due diligence; assessment appeals can generally be filed annually with the county.
- 7
Check Local Regulations
Review local zoning regulations and development codes, which vary between Pennsylvania municipalities. Confirm the intended use of the replacement property is permitted before closing.
Timeline Calculator
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Common Pitfalls
Overlooking local transfer tax variations
Issue
Pennsylvania transfer taxes vary significantly by municipality. Most locations pay about 2% combined (1% state + ~1% local), but Philadelphia's combined rate is 4.578% (effective July 1, 2025) and Pittsburgh's is 5%. Transfer taxes apply to both legs of an exchange and cannot be deferred.
Prevention
Look up the exact state-plus-local transfer tax rate for each property early in the process and include it in your exchange math. County recorder and city revenue department websites publish current rates.
Property tax assessment surprises
Issue
Pennsylvania's property tax system varies by county and school district, with different millage rates, assessment ratios, and reassessment practices.
Prevention
Research the county's assessment practices and current millage rates during due diligence. Budget for potential increases and consider filing an assessment appeal when appropriate.
Zoning and use restrictions
Issue
Pennsylvania municipalities have varying zoning regulations and use restrictions that can impact property value and development potential.
Prevention
Review local zoning codes thoroughly during due diligence. Consult with local zoning officials about potential changes or variances. Consider future development potential when selecting replacement properties.
Frequently Asked Questions
How does Pennsylvania’s conformity with federal 1031 rules affect my exchange?
For tax years beginning after December 31, 2022, Pennsylvania conforms to federal IRC Section 1031 under Act 53 of 2022. If your gain is deferred for federal income tax purposes, it is also deferred for Pennsylvania’s 3.07% flat personal income tax. The same federal deadlines apply: 45 days to identify replacement property and 180 days to complete the exchange. Before this change, Pennsylvania was the only state that taxed like-kind exchange gains at the state level even when they were deferred federally.
How do Pennsylvania’s transfer taxes affect 1031 exchanges?
Pennsylvania imposes a 1% state realty transfer tax, plus local transfer taxes that vary by municipality. Philadelphia’s city rate is 3.578% as of July 1, 2025, bringing its combined total to 4.578%; Pittsburgh’s combined total is 5%. Transfer taxes cannot be deferred through a 1031 exchange and are due at each closing, so factor them into your transaction costs for both the relinquished and replacement properties.
What form do I use to report a 1031 exchange on my Pennsylvania return?
Report the exchange federally on Form 8824. For Pennsylvania, a fully deferred exchange produces no reportable gain; any taxable amount (for example, boot received or a failed exchange) is reported on PA-40 Schedule D. PA Schedule D-1 (REV-1689) is a separate form used only for installment sales.
How do property taxes vary across Pennsylvania?
Property tax rates vary significantly across Pennsylvania because they are set locally by counties, municipalities, and school districts — school districts typically account for the largest portion of the bill. Each county has its own assessment practices and appeal procedures. Verify the actual millage rates and assessment for any specific replacement property with the county assessment office, as these costs directly affect your operating budget.
Major Cities
Philadelphia, Pittsburgh, Allentown, Erie, Reading
References
Official References
- PA Department of Revenue — PA PIT Guide: Net Gains (Losses) from the Sale, Exchange, or Disposition of Property
- PA Department of Revenue — Personal Income Tax Rates
- PA Department of Revenue — Realty Transfer Tax
- City of Philadelphia — Realty Transfer Tax
- IRS — Like-Kind Exchanges Under IRC Section 1031
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.