1031 Exchange & DST Investing in Pennsylvania
Pennsylvania historically did not recognize Section 1031 for personal income tax, but that changed for tax years beginning after 2022, so like-kind exchanges now defer Pennsylvania tax as well as federal. The state's flat rate is a relatively low 3.07%.
State tax treatment of a 1031 exchange
For tax years beginning after December 31, 2022, Pennsylvania conforms to Section 1031 for personal income tax purposes, so a qualifying like-kind exchange now defers Pennsylvania tax on the gain. Before that change, Pennsylvania did not recognize 1031 for individuals and taxed the gain in the year of sale. Pennsylvania applies a flat 3.07% personal income tax rate to capital gains.
Pennsylvania does not impose a separate clawback on deferred gain, and the state has no general nonresident real estate withholding tied to the personal income tax. The relatively low flat rate means federal deferral is often the larger driver of exchange planning.
Market snapshot
Philadelphia anchors eastern Pennsylvania with an eds-and-meds economy and steady multifamily demand, while the Lehigh Valley and Central Pennsylvania have become major industrial and warehouse hubs serving the Northeast supply chain. Pittsburgh combines a healthcare and technology base with affordable, higher-yield multifamily.
Industrial and logistics product draws heavy institutional and 1031 interest, and apartments in Philadelphia and Pittsburgh attract private investors. Now that Pennsylvania recognizes exchanges, in-state deferral has become newly relevant to local owners.
Why 1031 & DST investors look here
- Pennsylvania's recent conformity means investors can now defer state tax, not just federal, on a qualifying exchange
- Owners of Lehigh Valley industrial or Philadelphia and Pittsburgh multifamily may want to exit active management
- DST and 721 structures provide diversification and estate-planning flexibility beyond the low flat-rate state tax
Replacement-property options
A Pennsylvania exchange does not require in-state replacement property. Accredited investors can identify DST interests, 721 UPREIT contributions, or Opportunity Zone investments anywhere in the country, converting a hands-on Pennsylvania property into diversified, professionally managed passive real estate. These investments are illiquid, carry market and sponsor risk, and are available only to accredited investors.
Frequently asked questions
Does Pennsylvania tax a 1031 exchange?
Not for exchanges in tax years beginning after 2022. Pennsylvania now conforms to Section 1031, so a qualifying exchange defers Pennsylvania tax. For years before 2023, the state taxed the gain even in a federal exchange.
Can I exchange Pennsylvania property for out-of-state DSTs?
Yes. The replacement property does not need to be in Pennsylvania, so a Pennsylvania property can be exchanged into DST interests holding real estate in other states, subject to accredited-investor eligibility.
When did Pennsylvania start recognizing 1031 exchanges?
Pennsylvania began conforming to Section 1031 for personal income tax purposes for tax years beginning after December 31, 2022. Before that, it was one of the few states that did not recognize like-kind exchanges for individuals.
Gerald F. “Jerry” Baker, III — Founder & Managing Principal, Baker 1031 Investments · FINRA Series 22 / 63 · SIE. Read full bio →
State tax treatment is general and changes frequently; this page is educational and is not tax, legal, or investment advice. Confirm current state and local rules with your own CPA and attorney. Securities offered through Aurora Securities, member FINRA/SIPC. Real estate investments involve risk, including possible loss of principal.