The short answer
A 1031 exchange of Pennsylvania property defers the state's 3.07% personal income tax along with federal tax, but only for transactions in tax years beginning after December 31, 2022, when Act 53 of 2022 first made the requirements of IRC §1031 applicable to Pennsylvania returns. Pennsylvania withholds nothing at closing, so the full net proceeds can move to the qualified intermediary, though realty transfer tax (1% state plus local; 4.578% in total in Philadelphia) is still paid on each deed. Replacement property can be anywhere in the United States, including a Delaware Statutory Trust interest.
Pennsylvania at a glance
| State tax on real estate gains | 3.07% flat; gain is its own income class and losses cannot offset other classes |
|---|---|
| 1031 conformity | Yes, under Act 53 of 2022, for transactions in tax years beginning after Dec. 31, 2022 |
| Exchanges before 2023 | Not recognized; Pennsylvania taxed the exchange gain at 3.07% in the year it occurred |
| Withholding at closing | None on real estate sales; 3.07% withholding applies to lease payments to nonresidents |
| Realty transfer tax | 1% state plus local rates; Philadelphia totals 4.578% (3.578% city + 1% state) |
| Deferred-gain tracking | No claw-back and no annual report when replacement property is outside Pennsylvania |
| Reassessment on sale | Not triggered; counties use base-year values and spot reassessment is barred |
Pennsylvania only started honoring exchanges in 2023
Pennsylvania recognizes 1031 deferral for personal income tax only for transactions occurring in tax years beginning after December 31, 2022. Act 53 of 2022 rewrote section 303(a.5) of the Tax Reform Code so that the requirements of sections 1031 and 1035 of the Internal Revenue Code 'shall be applicable,' and the Department of Revenue's Personal Income Tax Guide now states that effective January 1, 2023 the deferral of tax on gains from like-kind exchanges is allowed.
The state test is now the federal test. If your exchange qualifies under IRC §1031, using an independent intermediary and the identification and closing windows covered in our deadlines guide, Pennsylvania defers the same gain; there is no separate Pennsylvania election, form or fee, and the deferred amount simply stays off PA-40 Schedule D for that year.
Act 53 changed the personal income tax article of the Tax Reform Code and nothing else. Realty transfer tax was not amended, so each deed in the exchange still carries the state and local transfer tax described below.
Exchanges completed before 2023 left a separate Pennsylvania tax history
For tax years before 2023 the Department treated a like-kind exchange as a taxable disposition and collected 3.07% on the gain in the year of the exchange, a position it held for years before the General Assembly changed the statute.
That history matters if you still own property acquired through a pre-2023 exchange. Federally your basis carried over from the relinquished property, but Pennsylvania already taxed that gain, so the property's Pennsylvania tax history is not the same as its federal one; have a CPA reconcile the two before you sell or exchange again, and keep the PA-40 Schedule D from the exchange year.
Act 53 contains no refund mechanism for earlier exchanges. On its face the amendment applies to transactions in tax years beginning after December 31, 2022, so a relinquished property sold in 2022 by a calendar-year taxpayer was a 2022 transaction under the old rule even if the replacement closed in 2023; ask your CPA how the Department treated any exchange that straddled the change.
A flat 3.07% on gains, with no loss netting across income classes
Pennsylvania taxes the gain on investment real estate at the same flat 3.07% it applies to wages. There is no preferential capital-gains rate and no exclusion for long holding periods; the gain falls into the class 'net gains from the sale, exchange or disposition of property,' one of the eight classes of income on the PA-40.
The eight-class system has a sting that makes deferral worth more than the rate suggests: Pennsylvania does not allow a loss in one class to offset gain in another, or a loss of one spouse to offset the other's gain. A loss from rents and royalties cannot shelter the gain on a sale.
On a $1,000,000 gain the Pennsylvania tax alone is $30,700. Philadelphia residents should also check the city's School Income Tax, 3.74% for 2025, which reaches residents' unearned income including short-term capital gains; whether it touches a particular sale depends on the holding period and the city's regulations.
Pennsylvania withholds from nonresident landlords, not from nonresident sellers
Pennsylvania has no withholding at closing when a nonresident sells real estate. The settlement agent releases the full net proceeds to the intermediary, and the nonresident seller reports the sale, or the deferral, on a nonresident PA-40 the following spring.
The withholding Pennsylvania does impose targets rent. A lessee paying lease payments for Pennsylvania real estate in the course of a trade or business to a nonresident lessor must withhold 3.07%, optional below $5,000 a year per payee and required above it, reported on Form 1099-MISC with the REV-1667 annual reconciliation through myPATH. 'Lease payments' include rents, royalties, bonus payments and damage rents.
An out-of-state owner of a Pennsylvania commercial or industrial rental therefore sees that withholding on the way in and nothing on the way out; once the property is sold there are no further Pennsylvania withholdings for a nonresident seller.
Realty transfer tax is paid on both legs: 1% state plus local, 4.578% in Philadelphia
Every deed in a Pennsylvania exchange carries realty transfer tax: 1% to the Commonwealth on the value of the real estate, plus a local tax that municipalities and school districts may share. Grantor and grantee are jointly and severally liable for the state tax, and custom rather than law splits the bill evenly.
Philadelphia is the outlier. The city's own rate is 3.578%, which with the Commonwealth's 1% makes 4.578% of the sale price; the city notes the tax is usually split between buyer and seller but that it can collect all of it from either party.
A 1031 exchange does not reduce or defer transfer tax, and it is paid again if you acquire Pennsylvania replacement property by deed. Whether transfer tax paid from exchange proceeds is treated as an exchange expense is a federal question for your qualified intermediary and CPA.
County base-year assessments: a Pennsylvania sale does not reassess the property
Selling a Pennsylvania property does not trigger a reassessment. Under the Consolidated County Assessment Law counties value property as of a base year, and section 8817 lets assessors change an individual assessment only when land is subdivided or improvements are added, removed or destroyed; a sale is not on the list, and the law separately prohibits spot reassessment.
The flip side is that Pennsylvania has no statewide reassessment cycle. Each county decides when to conduct a countywide revision, so base years differ from county to county, and a buyer's tax bill follows the county's base-year value rather than the price paid.
For an investor exchanging out of Pennsylvania, the assessment you have been paying on is what the buyer inherits; for an investor exchanging into Pennsylvania property, the bill you underwrite is the seller's, not one recalculated from your purchase.
Replacement property
Choosing a DST after selling Pennsylvania property
A Pennsylvania seller can complete the exchange into a Delaware Statutory Trust interest, and Act 53 conformity means the state's 3.07% is deferred alongside the federal gain for a 2023-or-later transaction. Breakwater Exchange has placed more than a billion dollars into DSTs offered by vetted national sponsors and holds licenses in all 50 states, Pennsylvania included.
Most DSTs hold property outside Pennsylvania. Income from real estate is generally taxed by the state where the property sits, so a Pennsylvania resident in a multi-state DST may owe nonresident returns in those states while still reporting the income on the PA-40; ask your CPA how income tax paid to those states interacts with your Pennsylvania return.
Pennsylvania imposes no claw-back on deferred gain that leaves the state and no annual form like Oregon's. When the DST eventually sells, the deferred gain is recognized under federal rules and, if you are still a Pennsylvania resident, generally reported on the PA-40 for that year unless you exchange again. If you need some liquidity, ask about the cash out DST structure and have your CPA confirm how Pennsylvania treats any amount you receive.
Confirm every figure here with your CPA and the Pennsylvania Department of Revenue before closing; Breakwater Exchange is a broker, not a tax adviser.
Questions investors ask about 1031 exchanges in Pennsylvania
Does Pennsylvania recognize a 1031 exchange completed in 2026?
Yes. Act 53 of 2022 made the requirements of IRC §1031 applicable for transactions in tax years beginning after December 31, 2022, so a 2026 exchange that qualifies federally defers Pennsylvania's 3.07% tax as well.
Pennsylvania taxed my 2019 exchange. Can I recover that tax now?
No. Act 53 applies prospectively and contains no refund for earlier years. The tax you paid does mean the replacement property's Pennsylvania history differs from its federal carryover history, which a CPA should reconcile before your next sale.
Is anything withheld when a nonresident sells Pennsylvania real estate?
No. Pennsylvania has no closing withholding on real estate sales; its 3.07% nonresident withholding applies to lease payments made by lessees in a trade or business, not to sale proceeds.
Does a 1031 exchange avoid Pennsylvania realty transfer tax?
No. The 1% state tax plus local transfer tax is due on each deed, and Philadelphia's combined 4.578% applies to city property; the exchange defers income tax only.
Can a Pennsylvania investor exchange into a DST that owns property in other states?
Yes. Pennsylvania has no claw-back or tracking rule for deferred gain, so the DST's out-of-state property is fine; expect nonresident filings where the DST's income is sourced and continued reporting on the PA-40 while you remain a resident.
Will my Pennsylvania rental be reassessed when I sell it?
Not because of the sale. Counties assess on base-year values, and section 8817 of the Consolidated County Assessment Law limits changes to subdivision and to improvements added, removed or destroyed.
Sources
The rules above were checked against these publications on September 18, 2026. Rates and forms change; confirm the current version with your CPA and the Pennsylvania tax agency before you close. This page is general information, not tax or legal advice.
- Act 53 of 2022 (HB 1342): section 303(a.5) like-kind conformity and section 24 applicability
- PA Personal Income Tax Guide: Net Gains (Losses) from the Sale, Exchange, or Disposition of Property
- PA Department of Revenue: Personal Income Tax (3.07% rate and eight classes of income)
- PA Department of Revenue: Realty Transfer Tax
- PA Department of Revenue: Nonresident Withholding (lease payments to nonresident lessors)
- City of Philadelphia: Realty Transfer Tax
- City of Philadelphia: School Income Tax
- 53 Pa.C.S. Chapter 88, Consolidated County Assessment Law (sections 8802 and 8817)