1031 Exchange Rules in Pennsylvania

Last reviewed: June 2026. State rules change. Verify current forms before closing.

What Is Different in Pennsylvania

For decades, Pennsylvania was the one state every 1031 guide had to footnote: it did not recognize like-kind deferral for its personal income tax at all. That ended with Act 53 of 2022. For tax years beginning in 2023 and later, Pennsylvania conforms to IRC Section 1031 — deferred federal gain is generally deferred for PA personal income tax too, and basis carries over to the replacement property. Closing day is simple: no nonresident withholding and no exemption certificate. The two things to watch are the conformity effective date and Pennsylvania’s separate Realty Transfer Tax.

Does Pennsylvania Conform to IRC Section 1031?

Yes — for tax years beginning in 2023 and later, under Act 53 of 2022 (HB 1342). A 1031 exchange is an IRS-approved way to sell investment property and buy replacement property without paying tax on the gain right away. If your exchange qualifies for federal deferral, Pennsylvania now defers its personal income tax too, and your basis in the relinquished property carries over to the replacement property. New to exchanges? Start with our 1031 exchange guide.

The history matters for older exchanges: before tax years beginning in 2023, Pennsylvania did not recognize 1031 deferral for personal income tax, so PA tax was owed in the year of an exchange even when federal tax was deferred. If you exchanged before 2023, your PA basis may differ from your federal basis — bring those records to your tax advisor.

Your replacement property can be in any state, and Pennsylvania has no claw-back or annual tracking of deferred gain afterward.

Pennsylvania Tax Rate on Real Estate Gains

Pennsylvania’s personal income tax is a flat 3.07%, and many municipalities add a local earned income tax on top (local EIT generally targets compensation, but confirm your locality’s treatment). On a $500,000 gain, the state share is roughly $15,355 — modest by Northeast standards, but real money. A qualifying exchange may defer all of it.

No Withholding at Closing

Pennsylvania imposes no real estate closing withholding on nonresident sellers. There is no exemption certificate to request and no payment held back at the closing table. (Pennsylvania does have general 3.07% withholding rules for certain non-wage PA-source payments, but those are not a real estate closing requirement.) You report the transaction through standard PA income tax filing.

The federal mechanics still govern the exchange itself: a qualified intermediary must hold your sale proceeds, and the 45-day and 180-day deadlines apply. A qualified intermediary is the independent party that holds your sale proceeds during an exchange.

Realty Transfer Tax Is a Separate Question

Pennsylvania’s Realty Transfer Tax — 1% state plus local rates that commonly bring the total to 2% or more (Philadelphia is significantly higher) — is a transfer tax, not an income tax. It applies to the conveyance regardless of whether your gain is deferred under Section 1031. An exchange defers income tax; it does not remove transfer tax. Analyze the RTT independently for both your sale and your replacement purchase if the replacement is also in Pennsylvania.

Federal Taxes Still Apply

A Pennsylvania exchange defers two layers: federal and state. Here is what a taxable sale looks like without an exchange, using round numbers.

Example: $1,000,000 sale of a Pennsylvania rental. Original purchase $600,000, with $100,000 of depreciation taken, so the adjusted basis is $500,000 and the total gain is $500,000.

Figures are illustrative and rounded. Your rates depend on income, filing status, basis, and locality. A qualifying 1031 exchange may defer the entire amount. Run your own numbers with our 1031 exchange calculators, then confirm them with your tax advisor.

Risks and Things That Go Wrong in Pennsylvania Exchanges

• Applying post-2023 rules to pre-2023 exchanges. Exchanges in tax years beginning before 2023 did not get PA deferral. Old guides say PA taxes exchanges; new guides say it defers — both are right for their era. Check which rules governed your transaction.
• Mismatched basis records. If you exchanged before 2023 and paid PA tax then, your Pennsylvania basis may be higher than your federal basis. Losing track of that difference means overpaying PA tax when you eventually sell.
• Expecting the exchange to erase transfer tax. The Realty Transfer Tax applies to the deed transfer no matter what Section 1031 does to your income tax.
• Boot surprises. Cash taken at closing or mortgage relief not offset with new debt or additional cash becomes recognized gain — taxable federally and in Pennsylvania now, not later.
• Failed deadlines. The federal 45-day identification and 180-day completion rules apply with no state extensions. See the IRS rules for 1031 exchanges.
• Deferral is not elimination. The IRS and Pennsylvania will tax the deferred gain when you eventually cash out. Plan the exit, not just the exchange.

Pennsylvania 1031 Exchange FAQs

Does Pennsylvania recognize 1031 exchanges?
Yes, for tax years beginning in 2023 and later, under Act 53 of 2022. Deferred federal gain is generally deferred for PA personal income tax, and basis carries over to the replacement property.

What about exchanges before 2023?
Pennsylvania did not recognize 1031 deferral for personal income tax before tax years beginning in 2023 — PA tax was due in the year of the exchange. Pre-2023 exchangers may have a PA basis that differs from federal basis.

Does Pennsylvania withhold tax when I sell investment property?
No. Pennsylvania has no nonresident real estate withholding at closing and no exemption certificate requirement.

Does a 1031 exchange avoid Pennsylvania transfer tax?
No. The Realty Transfer Tax applies to the conveyance independently of income-tax deferral.

Does Pennsylvania track my deferred gain after the exchange?
No. Pennsylvania has no claw-back rule and no annual reporting tied to deferred exchange gain.

Sources

• Act 53 of 2022 (HB 1342), amending 72 P.S. (PA personal income tax conformity to IRC 1031)
• Pennsylvania Department of Revenue, like-kind exchange guidance
• 72 P.S. Realty Transfer Tax provisions
• Tax Foundation, State Individual Income Tax Rates and Brackets, 2026

Want to learn more? Our 1031 exchange guide covers the full process from sale to replacement. Ready to start a Pennsylvania exchange? WealthBuilder 1031 is attorney-owned, serves all 50 states, and charges a flat $1,000 fee. Start at WealthBuilder1031.com or call 888-508-1901.

This page does not constitute legal or tax advice. Consult your attorney and tax advisor about your specific situation.

Ready to start your Pennsylvania 1031 exchange? WealthBuilder 1031 acts as your qualified intermediary for a flat $1,000 fee, $750 at your sale and $250 at your purchase. See our Pennsylvania 1031 exchange services to get started.