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PA DOR Issues Guidance On Like-Kind Exchanges

October 6, 2022

On September 27, 2022, the Pennsylvania Department of Revenue (“DOR”) issued a revision of Personal Income Tax Bulletin 2006-07 (the “Bulletin”), which confirms that recent Pennsylvania legislation reversed longstanding caselaw that disallowed deferral of gain recognition for like-kind exchanges. Under Act 53 of 2022, the Commonwealth now conforms with section 1031 of the Internal Revenue Code (“IRC 1031”) for Pennsylvania income tax purposes.

Under general income tax principles, when property is sold for a profit, the seller must pay tax on the gain recognized from the sale. IRC 1031 provides an exception to this general principle, however, when two parties exchange similar or “like-kind” real property that is used for business or held as an investment. For example, if Party A owns Building 1 and Party B owns Building 2, rather than selling the buildings and having to pay tax the year the sales occur, A and B can exchange the buildings to one another and defer the gain recognition and tax owed.

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Justin K. Abodalo

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