1031 Exchange in Pennsylvania: What Real Estate Investors Need to Know (Montgomery County Guide)
A 1031 exchange lets Montgomery County PA investors sell an investment property, reinvest into another like‑kind investment, and defer both federal and (now) Pennsylvania state capital gains taxes—if the rules and deadlines are followed precisely. It’s a powerful tool for scaling or repositioning your portfolio in 2026, but it has to be structured before you sell.
What a 1031 Exchange Is (and Isn’t)
Section 1031 of the Internal Revenue Code allows you to:
Sell a property held for investment or business use.
Reinvest the proceeds into another like‑kind investment property.
Defer capital gains and depreciation recapture that would otherwise be due at sale.
Important nuance:
The tax is postponed, not erased. It’s typically recognized later if you eventually sell without exchanging again or in certain other triggering events.
“Like‑kind” for real estate is broad:
You can exchange single‑family rentals, multifamily, commercial, land, and many other real estate types as long as both old and new properties are held for investment or business use.
Primary residences and flips held primarily for resale do not qualify.
Core Qualification Rules
To qualify for a 1031 exchange in 2026, key points include:
Use: Both relinquished (sold) and replacement (purchased) properties must be held for investment or productive use in a trade or business, not as your primary residence.
Same taxpayer: The same taxpayer (or disregarded entity, like a single‑member LLC) must sell and buy, with the qualified intermediary handling title mechanics.
Like‑kind: Almost all U.S. real property held for investment is like‑kind to other U.S. investment real property.
You can go:
Single‑family rental → multifamily.
Multifamily → commercial or mixed‑use.
Land → rental property, and vice versa.
Critical 45-Day and 180-Day Deadlines
The timelines are strict and run at the same time, not one after another.
From the date you close on the sale of your relinquished property (Day 1):
You have 45 days to identify potential replacement properties in writing following IRS rules.
You have a total of 180 days from Day 1 to close on the replacement property (or until your tax return due date, including extensions, if earlier).
There are no routine extensions for weekends, lender delays, or inspection issues; missing either deadline disqualifies the exchange and makes the gain taxable in that year.
That’s why planning must start before you list, not after you’re already under contract.
The Role of the Qualified Intermediary (QI)
You cannot touch or control the sale proceeds if you want a valid exchange.
A Qualified Intermediary (QI):
Receives and holds the sale proceeds in a separate exchange account.
Prepares exchange documents (exchange agreement, assignment of contracts, identification forms, etc.).
Coordinates disbursement of funds to purchase the replacement property according to IRS rules.
If funds are paid directly to you or placed under your control, the exchange can be disqualified and the gain becomes immediately taxable.
Choosing an experienced, well‑insured QI is essential.
Pennsylvania State Tax Treatment (Good News Now)
Historically, Pennsylvania did not recognize 1031 exchanges, so state tax was due even when federal gain was deferred. That changed with Act 53 of 2022:
For tax years beginning after December 31, 2022, Pennsylvania conforms to Section 1031 and allows state tax deferral on qualifying like‑kind exchanges.
This means a properly structured 1031 can now defer both federal and PA capital gains on eligible real estate for Montgomery County investors.
It’s still critical to have your CPA confirm details specific to your situation, especially if you own out‑of‑state property or multiple entities.
When a 1031 Exchange Makes Sense
A 1031 exchange may be attractive if you:
Have significant appreciation and want to avoid a large immediate tax bill.
Have taken substantial depreciation and want to defer recapture.
Want to consolidate multiple smaller properties into one larger asset or vice versa.
Want to shift into different property types or markets to improve cash flow or reduce management.
Are continuing, not exiting, your real estate investing strategy.
It may not be ideal if:
You need cash from the sale for non‑real‑estate goals.
You’re planning to retire from active investing and want simplicity.
The deal size or gain is too small to justify added complexity and fees.
Common 1031 Mistakes to Avoid
Waiting until after closing to bring in a QI or CPA.
Missing the 45‑day identification or 180‑day closing deadlines.
Receiving or controlling sale proceeds, even briefly.
Not aligning contract timelines with exchange deadlines.
Failing to confirm the replacement property’s financing and feasibility within the window.
Because the rules are technical, you should coordinate early with your CPA, attorney, QI, and agent.
Thinking About Selling an Investment Property?
First, understand your property’s likely sale price and gain in today’s market.
👉 Get Your Instant Home Value Here
👉 Then schedule an investor strategy consultation
You can review:
Estimated sale price and capital gains exposure.
Whether a 1031 exchange makes sense vs a taxable sale.
Timeline coordination with the 45‑/180‑day rules.
Replacement property criteria and strategy in or beyond Montgomery County.
