1031 Exchange in Pennsylvania

By Skyline Capital Investments · Updated October 26, 2026 · 7 min read

Does Pennsylvania recognize 1031 exchanges?

Yes. The Pennsylvania Department of Revenue allows deferral of personal income tax on gains from like-kind exchanges effective January 1, 2023, and it uses the federal definition of like-kind property in Section 1031 of the Internal Revenue Code. A Pennsylvania 1031 exchange that qualifies federally now qualifies for the state as well.

Before 2023, the department did not allow that deferral for personal income tax, so an exchange deferred federal tax but the 3.07% state tax was due in the year of the sale. If you completed an exchange before 2023, your Pennsylvania basis in the replacement property may already reflect gain you paid state tax on. Keep those records.

Federal 1031 rules that apply in Pennsylvania

Pennsylvania adds no deadlines of its own. Your written identification of replacement property is due 45 days after the sale closes, and the purchase must close within 180 days or by your return due date, whichever comes first. Both properties must be real property held for business or investment, and a qualified intermediary must hold the proceeds so you never have access to them.

To defer all the gain, buy replacement property of equal or greater value and reinvest all the net cash. Cash you keep, and debt paid off that you do not replace, is boot and is taxed by the IRS and by Pennsylvania. Our guide to 1031 exchange rules covers the identification tests and boot in detail, and the complete 1031 exchange guide explains the process from start to finish.

Pennsylvania withholding at closing

Pennsylvania does not require withholding at closing when an individual, resident or not, sells Pennsylvania real estate. The Department of Revenue’s nonresident withholding rules cover non-employee pay and business lease payments, not property sales. That makes a Pennsylvania exchange simpler than one in a state such as Oregon, where escrow has to work out a withholding figure.

The gain is still Pennsylvania-source income. A nonresident who takes boot pays the 3.07% on it with a Pennsylvania return. If the building is held by a partnership or LLC, the entity makes withholding payments on nonresident owners’ shares of Pennsylvania income, which in an exchange means only the gain actually recognized.

Realty transfer tax in a Pennsylvania exchange

Realty transfer tax is the cost a 1031 exchange does not touch. Pennsylvania charges 1% of the value on each deed, plus the local share collected by the county recorder of deeds, and like-kind exchanges are not on the Department of Revenue’s list of exclusions. An exchange involves at least two deeds, so expect transfer tax on the sale of the old building and on the purchase of a Pennsylvania replacement.

In Philadelphia the total is 4.578% since July 1, 2025, made up of 3.578% for the city and 1% for the state. On a $2,000,000 sale that is $91,560, and the buyer and seller usually split it, though the contract decides. Budget the seller’s share as cash at closing. It is a selling expense that lowers the gain, but it is not deferred.

Does Pennsylvania have a 1031 clawback?

No. Pennsylvania has no rule like Oregon’s or California’s that tracks deferred gain after you exchange into another state. You can sell a building in Pennsylvania, buy a replacement in North Carolina or Florida, and file nothing extra with Pennsylvania each year. Only California, Massachusetts, Montana and Oregon have clawback rules.

Deferred gain is not forgiven, though. If you are still a Pennsylvania resident when you later sell the replacement in a taxable sale, the whole gain, including the part rolled over from the Pennsylvania building, is taxable to you as a resident.

Does Pennsylvania regulate qualified intermediaries?

No. Pennsylvania is not one of the nine states with a law regulating exchange intermediaries: California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia and Washington. A Pennsylvania intermediary needs no state license, bond or insurance to hold your exchange money.

That puts the checking on you. Ask any intermediary for proof of a fidelity bond and errors and omissions insurance, how your money will be held, whether withdrawals need your signature, and who audits the accounts. Your intermediary cannot be your agent from the past two years, such as your attorney, accountant, employee or real estate broker. Our guide to choosing a 1031 qualified intermediary lists the questions to ask.

Pennsylvania basis and depreciation after an exchange

Your replacement property carries over the basis of the building you sold, adjusted for any boot and added cash, and Pennsylvania figures that basis under its own depreciation rules. Pennsylvania personal income tax does not follow federal bonus depreciation, and it reduces basis by the greater of the depreciation you deducted or the straight-line amount allowable.

So if you took bonus depreciation federally after a cost segregation study, your Pennsylvania basis in the old building was higher than your federal basis, and that difference rolls into the replacement. Keep two depreciation schedules going forward. When you eventually sell in a taxable sale, the Pennsylvania gain will be figured from the Pennsylvania basis, not the federal one.

Exchanges by partnerships and LLCs in Pennsylvania

Most Pennsylvania apartment buildings are held in an LLC taxed as a partnership, and the exchange has to be done by the same taxpayer that sold. If the LLC owns the building, the LLC must buy the replacement. Members who want to go separate ways need to plan that well before the sale, with advice, since a late restructuring can break the exchange.

The partnership files the information return and passes any recognized gain through to its members. Nonresident members still need the entity to make Pennsylvania withholding payments on their shares of recognized income, and Pennsylvania’s rule against netting losses across income classes applies at the member level.

Common 1031 exchange paths for Pennsylvania owners

Pennsylvania to Pennsylvania is common for owners trading up inside a market they know, such as from small buildings in the Philadelphia suburbs into a larger property in the Lehigh Valley or Pittsburgh. Watch the transfer tax on both deeds, and check the replacement’s assessment against the county’s common level ratio, since a school district may appeal after your purchase.

Pennsylvania to another state works the same way federally and needs no Pennsylvania clawback filing. Owners heading south often trade into faster-growing apartment markets. Check the new state’s rules on withholding and intermediaries before you identify property.

Out-of-state to Pennsylvania is straightforward on the Pennsylvania side. If you are leaving a clawback state such as California, that state may keep a claim on the deferred gain.

Worked example: a Philadelphia exchange

An owner sells a 20-unit Philadelphia building for $2,000,000. The seller’s half of the 4.578% transfer tax is $45,780, and other selling costs are $80,000, so the amount realized is $1,874,220. With an adjusted basis of $600,000, the gain is $1,274,220. The $900,000 mortgage is paid off, leaving $974,220 of net cash at the intermediary.

The owner keeps $100,000 and reinvests $874,220 as the down payment on a $2,200,000 building, with a new loan of $1,325,780. The $100,000 is boot, so $100,000 of gain is recognized and $1,174,220 is deferred. Pennsylvania tax on the boot is $3,070 at 3.07%; Pennsylvania tax deferred is about $36,049.

There is no Pennsylvania withholding at the Philadelphia closing. If the owner had reinvested all $974,220 and taken no cash, the entire $1,274,220 gain would be deferred, and the Pennsylvania tax put off would be about $39,119. The $45,780 of transfer tax is paid either way.

Timeline tips for a Pennsylvania exchange

Most failed exchanges fail on paperwork or timing, not tax law. In Pennsylvania the extra items are the transfer tax and the school district’s view of the replacement’s assessment, both of which you can check before you sign. Work through this list with your intermediary and closing attorney before the sale closes.

• Sign the exchange agreement and assign the sale contract before closing.
• Settle the transfer tax split in the agreement of sale, and budget for transfer tax again if the replacement is in Pennsylvania.
• Ask your CPA for the Pennsylvania depreciation schedule. Pennsylvania does not follow federal bonus depreciation, so your state basis carries over differently from your federal basis.
• Look up the replacement property’s assessment and the county CLR before day 45, so a school district appeal does not surprise you.
• If you sell late in the year, extend your return so the due date does not cut the 180 days short.

Selling a Pennsylvania apartment building as part of an exchange

Skyline buys apartment buildings with five or more units in Pennsylvania. We buy directly, close on your timeline, and can work inside 1031 deadlines. We work with your intermediary on the assignment and can schedule closing to give you room to line up a replacement before the 45-day clock starts.

For the tax you would owe without an exchange, see Pennsylvania capital gains tax on real estate. The 1031 exchange calculator runs the federal side for your own figures.