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Finally, a 1031 Exchange in PA?

Pennsylvania’s 2013-2014 state budget would align PA with the similar federal government program.

1031 exchange in PA

Governor Corbett recently announced his plans for the State’s 2013-2014 general budget and while it includes an increase of nearly $680 million from the previous years’ budget, there are some bright spots for Real Estate Investing in PA.

First off, most savvy Real Estate investors in Pennsylvania know that the PA tax code currently does not contain a provision for Like Kind Exchanges.

Now, without going into major details, basically what this means is that, while a Real Estate Investor in Pennsylvania could “Exchange” out of one property and into another and use the Like Kind Exchange (code 1031 of the IRS code) provision to eliminate any Federal tax on the gains, that same Real Estate Investor would still have to pay personal income tax to Pennsylvania – to the tune of 3.07%.

While 3% doesn’t seem much in the overall scheme of things, put it in the context of selling an office building. As an example; an Investor has owned an office building for numerous years, has paid off the mortgage, depreciated the majority of the unit down and has enjoyed a nice appreciation over where he purchased. He Runs a ROE (Return on Equity) analysis and finds he could significantly improve his rate of return by “upgrading” to an even larger building; so he decides to sell.

Assuming a “gain” of $5 million from the sale, this investor would create a $150,000+ tax liability to Pennsylvania. I’m not sure about your thoughts but $150k is a lot of money to pay just for the privilege of selling your property. (BTW; this is over and above the Real Estate transfer tax in PA, which if this property was inside of Philadelphia, could have been an additional $120,000.)

Of course there is always give-and-take when it comes to budget issues and while us Investors may get the 1031 exchange in PA, it does appear as though we will lose the 89-11 Tax Loophole (click for additional info on that program). However, all things being equal I think the majority of us will opt for the inclusion of the 1031 exchange in PA’s tax code!