Every sale of real estate in Pennsylvania is subject to a transfer tax based on the sale price that must be paid when the deed is recorded. Municipalities are allowed to add their own transfer tax to the 1% levy by the state. Philadelphia adds 3% to the state tax and is estimated to charge the highest transfer tax of any major U. S. city. For years, however, buyers and sellers of commercial real estate have used a number of measures to escape the full burden of the tax. Now, the City Council is considering a bill to end these practices.
One common method of escaping the full transfer tax is the retention by the seller of a small interest in the property rather than selling it outright. A second is to convey title to a partnership or corporation and then to sell the partnership or shares in the corporation, In either case, the amount of transfer tax that is actually paid is either eliminated or greatly reduced.
The council member offering the bill estimates that high end commercial property deals more commonly use such techniques than do the purchasers of residential properties. An investigation by the Philadelphia Inquirer found that in the nine commercial real estate transactions valued at more than $100 million since the beginning of 2015, the transfer tax was paid in full only twice. The cost to the city of the avoided tax was estimated at $28.4 million. These methods are not illegal, but they deprive the city of a large amount of tax revenue. The bill’s sponsor also says that more aggressive collection of the transfer tax may enable the City to lower the rate of the tax.
Negotiating the sale of commercial real estate can be very complicated. A prospective buyer or seller may wish to consult an attorney who specializes in real estate purchases and sales for advice on structuring the transaction in ways that can lawfully reduce the transfer tax or other fees payable in connection with the transaction.
Source: Philadelphia Inquirer, “City Council bill seeks to crack down on real estate transfer-tax dodgers,” Jacob Adelman, Sep. 22, 2016