IRC § 1031 Like-Kind Exchanges (1031 Exchange) allows real estate investors to defer capital gains taxes by exchanging investment properties for similar or greater value properties. While this Federal provision has been consistent over the years, state-level rules, such as those in Pennsylvania, have seen changes that affect how these transactions are reported.
Before the States Act 53 of 2022, Pennsylvania did not conform to Section 1031. As a result, the gain from sales of property involved in a 1031 Exchange was required to be recognized in PA, causing a disparity in income recognition in the tax year the transaction took place. Act 53 of 2022 changed PA tax law to allow the deferral of gains resulting from a 1031 Exchange if the following requirements of a 1031 Exchange are met:
- Both properties must be held for use in trade or business, or investment.
- Both properties must be similar enough to qualify as “like-kind.”
- Real property can’t be like-kind to personal property
- You must meet two time limits, or the entire gain will be taxable. These limits cannot be extended for any circumstance or hardship except for presidentially declared disasters.
- 45 days – You have 45 days to identify replacement properties in writing, signed by you and delivered to someone involved in the exchange, but notice to agents like attorneys or accountants is not enough
- 180 days – Replacement property must be received and the exchange completed within 180 days or by the tax return due date, and it must match the identified property.
- Replacement properties must be clearly described, such as by legal description, street address, or name
The conformity to Federal IRC § 1031 exchange rules in Pennsylvania marks a significant shift in how real estate investors can approach capital gains taxation and reporting in Pennsylvania for tax years following January 1, 2023. As investors navigate these changes, understanding the nuances of this reporting will be crucial for effective tax management and compliance. As always, we recommend contacting your WG tax advisor for more information on IRC § 1031 exchanges.
