Capital gains tax in Pennsylvania (2026): selling a business, real estate or farm

Flat 3.07%, but losses stay in their own box

Pennsylvania has no capital gains provision at all. Gains land in the income class called net gains or income from the sale, exchange or disposition of property, and every class is taxed at the same flat 3.07% (PA Department of Revenue; the 2026 PA-40 ES instructions use 0.0307). The rate has not changed since 2004.

The flat rate is the simple part. The class rules are where Pennsylvania differs from the federal return. A loss offsets gains only inside the same class and the same year. A capital loss cannot reduce wages, interest or business profit, Pennsylvania has no provision for carrying a loss to another year, and one spouse's loss cannot offset the other's gain even on a joint return (PA PIT Guide, net gains chapter). Federal carryforwards you built up, the kind discussed in capital loss carryovers, do nothing here. To use a loss in Pennsylvania, realize it in the same year as the gain, in the name of the spouse who has the gain; see tax-loss harvesting.

Federal tax still applies at 0%, 15% or 20% on long-term gain, with 20% above $613,700 of joint taxable income for 2026 (Rev. Proc. 2025-32); the federal capital gains guide has the rest.

Worked example: a low flat rate and a neighbor

A joint-filing couple sells the company they ran for a $2,000,000 gain, $200,000 of it equipment recapture, paid in cash in 2026. Pennsylvania adds $61,400, and total tax caused by the sale is $489,875, an effective 24.5%. Pennsylvania has no recapture concept, so the equipment piece is taxed at the same 3.07% (2026) as the rest.

• Across the river: the same share sale by New Jersey residents costs $612,675, or $122,800 more, almost all of it state tax.
• Five-year note on an asset sale: total tax falls to $384,233, while Pennsylvania's share stays at $61,400. With one flat rate, timing never changes the Pennsylvania bill; the savings are federal.

The installment method works for assets, not for stock

Pennsylvania lets a cash-basis seller of real or tangible personal property choose between reporting the whole gain in the year of sale or electing the installment method on PA Schedule D-1 (REV-1689). Accrual-basis taxpayers cannot use it, and a sale at a loss cannot either (PA PIT Guide).

The surprise is intangibles. Even when you sell stock or an LLC interest on a note, a cash-basis Pennsylvania taxpayer may not elect the installment method. The choices are reporting all the gain in the year of sale, or the cost recovery method, where each payment is treated as return of basis until basis is fully recovered and only then as gain (PA PIT Guide). That can push Pennsylvania gain later, not earlier, but it changes the cash-flow picture of a seller-financed stock deal. Settle it before choosing between an asset sale and a stock sale, and model the federal side with the Section 453 installment sale analysis.

Your Pennsylvania basis may not match the federal one

Pennsylvania keeps its own basis records in several places. It recognized like-kind exchange deferral only for exchanges on or after January 1, 2023; an older exchange was taxable for Pennsylvania, so property received in it can carry a higher Pennsylvania basis than federal basis (PA PIT Guide). The guide also lists Section 338(h)(10) transactions, sales of business assets and related-party sales as federal-Pennsylvania differences. Before a sale, ask your CPA to rebuild Pennsylvania basis instead of copying the federal figure, especially for property that came out of a pre-2023 1031 exchange.

Local taxes and the realty transfer tax

Local earned income taxes are levied on wages and net business profits, so a long-term gain on investments is outside them. Philadelphia is the exception worth knowing: its School Income Tax, 3.735% for 2026 on residents' unearned income, reaches capital gains only on property held less than six months (City of Philadelphia).

Real estate carries a transfer tax: 1% to the Commonwealth on the value transferred, plus a local rate set by the municipality and school district (PA Department of Revenue). In Philadelphia the city rate is 3.578%, for 4.578% in total, also triggered by transfers of 75% or more of a real estate company. The tax is usually split between buyer and seller by contract (City of Philadelphia). Pennsylvania's nonresident withholding program covers rents, royalties and nonemployee compensation rather than sale proceeds, though nonresidents still owe tax on Pennsylvania-source gains (PA Department of Revenue).

Inheritance tax: the hold-versus-sell question

Pennsylvania taxes inheritances at 0% to a spouse (and to a parent from a child aged 21 or younger), 4.5% to children and other lineal heirs, 12% to siblings and 15% to other heirs, with a 5% discount if paid within three months of death (PA Department of Revenue). Selling before death does not avoid it, since cash is taxed the same way. Holding appreciated property keeps the federal basis step-up for heirs, and qualifying farmland passing to eligible family members has been exempt since July 1, 2012. The step-up at death analysis weighs the two, and the capital gains tax by state table compares neighbors like New Jersey. To see every option on your own sale, get the Big Sale Tax Analysis.

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Frequently asked questions