Taxpayers in the state of Pennsylvania can now take advantage of favorable tax treatment under Section 1031 of the U.S. Tax Code, thanks to a recent law change. House Bill 1342, which was signed into law by Governor Tom Wolf on July 8, 2022, includes a provision that brings the state’s tax treatment of 1031 exchanges in line with the Federal Internal Revenue Code. This move makes Pennsylvania one of the last states in the U.S. to conform to section 1031 of the internal revenue code (IRC).
Here’s a look at the details of the law change and the potential impacts it brings to PA property owners.
Section 1031 of the federal tax code allows taxpayers to defer their federal capital gains taxes by exchanging an investment property for a like-kind replacement property. However, until now, the state of Pennsylvania did not conform to the federal tax code.
Previously, a capital gain created by like-kind exchange triggered Pennsylvania state income taxes at the time of the property sale. Since a 1031 exchange requires a full reinvestment of the sales proceeds, if a property owner used a portion of the proceeds to pay their state income taxes, they would also lose the ability to complete a full exchange, triggering additional taxes at the federal level.
The new law reconciles this issue, allowing both resident and non-resident property owners in the state of PA to enjoy the full advantages of engaging in a 1031 exchange. The law applies to both individuals and partnerships and goes into effect for all exchanges that occur after December 31, 2022. Exchanges that are initiated before this date will not receive the new tax treatment.
Bringing the state and federal laws into alignment creates better reinvestment opportunities and preserves equity for property owners in the state of PA. This change will also help streamline tax reporting, reduce administrative headaches and save PA property owners both time and potential money.
To learn more about how HB 1342 may impact you or discuss potential opportunities to take advantage of a Pennsylvania 1031 exchange, schedule a consultation with our team today.
Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.
This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.
There are material risks associated with investing in real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.
Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services through Concorde Asset Management, LLC (CAM), an SEC-registered investment adviser. Insurance offered through Concorde Insurance Agency, Inc. (CIA). Fortitude Investment Group is independent of CIS, CAM, and CIA.