Pennsylvania Does NOT Recognize 1031 Exchanges

Pennsylvania income tax law does not provide for or recognize 1031 tax-deferred exchange transactions. Section 1031 of the Internal Revenue Code is a federal income tax code. States do not have to follow federal income tax laws, including Section 1031, although most states do.

Pennsylvannia is one state that does not recognize the tax-deferred exchange under Section 1031. However, they do allow a taxpayer to defer income taxes, including gain from the sale of rental property, if the taxpayer uses an accounting methodology such as Generally Accepted Accounting Principles (GAAP) that allows the taxpayer to defer the income tax consequences.

The bottom line is that individual taxpayers use the cash basis and not GAAP or any other method that would qualify, so individuals do not qualify for 1031 exchange treatment under Pennsylvannia state income tax laws.

The taxpayer can still complete a 1031 exchange and defer their Federal income tax liability under Section 1031, but will have to recognize and pay Pennsylvannia's state income tax on the disposition of a rental property.

There are other tax provisions within Pennsylvannia, such as the Realty Transfer Tax (RTT) that cause issues and add to the costs of completing a reverse 1031 exchange.

You can read Pennsylvannia's most recent letter ruling regarding this issue on our website at: http://www.exeterco.com/pdfs/PA_PIT_Bulletin_2006-07.pdf