A 1031 exchange in Pennsylvania lets you sell investment real estate and reinvest in like-kind property while deferring the tax on the gain. The federal rules apply the same way everywhere, but Pennsylvania has a history no other state shares: until recently, it did not let individuals defer the state tax in a 1031 at all. That changed for tax years beginning in 2023, and the change is the single most important thing for a Pennsylvania investor to understand. We act as your qualified intermediary, holding the proceeds and handling the documentation so the exchange holds from sale to closing.
Table of contents
- Pennsylvania did not recognize 1031 for individuals until 2023
- How much is capital gains tax on real estate in Pennsylvania?
- Pennsylvania nonresident withholding
- Pennsylvania 1031 exchange rules and timeline
- 1031 exchanges across Pennsylvania markets
- Common Pennsylvania 1031 exchange mistakes
- Start your Pennsylvania 1031 exchange
- Frequently asked questions
Pennsylvania did not recognize 1031 for individuals until 2023
For decades, Pennsylvania was the lone holdout. Under its Tax Reform Code, the state did not adopt Section 1031 for personal income tax purposes, so an individual who completed a federal 1031 still owed Pennsylvania's flat personal income tax on the gain in the year of the exchange, even though the federal tax was deferred. The Pennsylvania Supreme Court confirmed this treatment for pre-2023 years in Pearlstein v. Commonwealth, upholding assessments against taxpayers who had deferred the gain on their state returns.
Act 53 of 2022 changed the law. For tax years beginning on or after January 1, 2023, Pennsylvania conforms its personal income tax to Section 1031, so a qualifying exchange now defers the Pennsylvania tax as well as the federal tax. This removed the old 3.07% state hit on exchanges and brought Pennsylvania in line with the rest of the country. C-corporations following GAAP could defer under federal rules even before the change.
The practical points that follow from this history: a 1031 completed in Pennsylvania today defers state tax, but exchanges completed in 2022 or earlier were treated differently, so timing matters if you are looking at a prior transaction, and you should confirm the current treatment with your tax advisor before relying on it.
How much is capital gains tax on real estate in Pennsylvania?
Pennsylvania taxes the gain at a flat 3.07% personal income tax rate, with no separate capital gains rate. Local earned income taxes generally do not reach capital gains, though Philadelphia and some localities have their own tax regimes worth checking. The 3.07% is on top of the federal tax an exchange also defers:
- Long-term capital gains at 0%, 15%, or 20%, with the 20% rate applying above $545,500 of taxable income for single filers and $613,700 for married couples filing jointly in 2026.
- The 3.8% Net Investment Income Tax above $200,000 of modified adjusted gross income for single filers, $250,000 for married couples.
- Depreciation recapture, taxed as unrecaptured Section 1250 gain at up to 25%.
Since 2023, a Pennsylvania 1031 defers both layers. The full federal framework is in our main 1031 exchange guide.
Pennsylvania nonresident withholding
Pennsylvania requires real estate withholding on nonresident sellers. As with other states, a qualifying 1031 in which the gain is not recognized is the basis for avoiding the withholding, supported by your intermediary's documentation and coordinated at closing. Confirm the current form and rate with your closing agent, since the procedural details are set at the state level and can change.
Pennsylvania 1031 exchange rules and timeline
The federal deadlines govern, and they are strict:
- 45-day identification. Identify replacement property in writing within 45 days of the sale.
- 180-day closing. Close within 180 days of the sale, or by your return due date including extensions, whichever is earlier.
- No constructive receipt. Proceeds go to your qualified intermediary, never to you.
- Equal or greater value and debt. Reinvest all net proceeds and match or exceed the relinquished value and debt, or the shortfall is taxable boot.
- Same taxpayer. The entity that sold must be the entity that buys.
1031 exchanges across Pennsylvania markets
Philadelphia anchors the state's exchange volume, in multifamily, commercial, and industrial property. Pittsburgh draws investment tied to its health care and university base and ongoing neighborhood revitalization. The standout is the Lehigh Valley, around Allentown, Bethlehem, and Easton, which has become one of the East Coast's major warehouse and logistics corridors thanks to its position on the I-78 and I-81 freight routes, and is a frequent target for industrial exchanges. Harrisburg and the south-central counties add further logistics and commercial demand. Pennsylvania property tax is set locally and funds school districts, so effective rates vary widely by municipality and belong in any replacement-property analysis.
Common Pennsylvania 1031 exchange mistakes
- Assuming the old rule still applies and paying state tax unnecessarily, or assuming the new rule applied to a pre-2023 exchange.
- Overlooking nonresident withholding and the certification needed to avoid it.
- Taking receipt of the proceeds, even briefly, which disqualifies the exchange.
- Missing the 45-day identification window, or trading down into taxable boot.
Start your Pennsylvania 1031 exchange
Set up your exchange before your relinquished property closes, so the proceeds never reach your hands and the state deferral and any withholding certification are handled correctly. Contact our team to begin, or to talk through a specific deal.
Frequently asked questions
Does Pennsylvania recognize 1031 exchanges now?
Yes. For tax years beginning on or after January 1, 2023, Act 53 of 2022 conforms Pennsylvania's personal income tax to Section 1031, so a qualifying exchange defers the state tax. Before 2023, individuals had to pay Pennsylvania tax on the gain even in a federal exchange.
How much is capital gains tax on real estate in Pennsylvania?
Pennsylvania taxes the gain at a flat 3.07% personal income tax rate, on top of federal capital gains tax. Since 2023, a 1031 can defer the Pennsylvania portion.
Does Pennsylvania have nonresident withholding on a property sale?
Yes. Pennsylvania requires real estate withholding on nonresident sellers, and a qualifying 1031 is the basis for avoiding it. Confirm the current form and rate with your closing agent.
Do I need a qualified intermediary for a Pennsylvania 1031 exchange?
Yes. The intermediary must hold the proceeds and facilitate the exchange. Engage one before the relinquished property closes.
This page is general information, not tax or legal advice. We act as a qualified intermediary and do not provide tax or legal advice. State and federal rules and thresholds change, and Pennsylvania's treatment in particular changed in 2023; confirm current figures and the treatment for your tax year with your tax advisor.
