PA TRANSFER TAX
As you are probably aware by now that the Pennsylvania Department of Revenue approved amendments and/or clarifications to the Realty Transfer Tax regulations. The amendments were effective January 3, 2008 and change tax applicability to a variety of transactions. Assignments of agreements to purchase are substantially affected by the amended regulations, and have produced confusion within the real estate industry, resulting in potential, but unanticipated additional tax liability at or even after settlement. Please note the following examples for clarification of the amendments effecting the assignment of an agreement to purchase.
Example 1 Assignment of Purchase Agreement
Albert enters into an agreement to purchase property from Barry for $100,000. Albert then enters into an assignment agreement to sell the property to Chad for $200,000. At settlement, the Deed is conveyed directly from Barry to Chad. The Department of Revenue will view this scenario as two transfer taxable events (Barry to Albert for $100,000 and Albert to Chad for $200,000).
Example 2 Installment Sale Agreement
ABC Builders and Acme Development Company enter into an Installment Agreement (“Agreement”) whereby, in consideration of earnest monies paid at the time of execution of the Agreement, and a stated purchase price per lot to be paid at some time in the future, ABC Builders agrees to purchase designated lots in Acme’s subdivision. ABC Builders business plan is to subsequently enter into residential construction contracts with buyers for the construction of single-family dwellings upon the lots.
The position of the Department of Revenue is that transfer tax is due on the stated consideration upon the signing of the Installment Agreement.
Example 3 Transfer into an LLC
John and/or assigns enter into an agreement of sale to purchase real estate in the amount of $600,000 in his individual name for business purposes. At the advice of his attorney, he intends to take title to the property in an LLC. At the time the purchase agreement is executed, the documents to form the LLC have not been filed. At settlement, the property is transferred directly to the LLC.
Because the LLC was not in existence at the time the agreement was executed, John cannot be acting as agent or as straw party for the entity. Therefore, the Department of Revenue will view this transaction as two taxable events, even though only one document was involved with the transfer. The Department of Revenue views the transfer from Seller to John in the amount of $600,000 and a second taxable event to have occurred between John and the LLC. The transfer tax for the second “transfer” will be calculated utilizing the computed value.
Some other transaction types addressed in the amendments include gifts, trusts, business entity conversions and 1031 like-kind exchanges.
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This article has been prepared for general informational and educational purposes only and is not legal advice. Legal advice is dependent upon the specific circumstances of each situation. The information contained in this article cannot replace the advice of competent legal counsel.