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PENNSYLVANIA REALTY TRANSFER
TAX UPDATE
Amended Regulations Could Result in a Double Tax
on Assignments of Purchase Agreements and Like-Kind Exchanges
by Jeffrey G. DiAmico
Assignments of agreements of sale
and like-kind exchanges are now
potentially subject to a double tax
thanks to the Pennsylvania Department
of Revenue’s (“Department”) December
15, 2007 amendments to the Realty
Transfer Tax Regulations (“Amended
Regulations”). The double tax has
been confirmed as recently as April
18, 2008 when the Department
revised its Realty Transfer Tax Bulletin
2008-01, which was originally issued
on January 3, 2008 (“Bulletin”). The
Bulletin was issued in an attempt to
provide more detailed “guidance” on
like-kind exchanges, assignments of
agreements of sale, and other taxable
events, through a series of hypothetical
scenarios and the Department’s
explanation of the tax results for each
scenario.
Realty Transfer Tax
The Pennsylvania Realty Transfer
Tax is imposed at the rate of one percent
(1%) for the State and generally
one percent (1%) for the local portion
of the actual consideration paid, or to
be paid, for the transfer of an interest
in real estate. Some larger counties/
municipalities charge a higher local
rate, such as Philadelphia County
which charges three percent (3%).
When no consideration or nominal
consideration is paid, the tax is based
on the property’s actual monetary
worth computed through the use of
assessed value for local real estate tax
purposes and adjusted to the market
value. The realty transfer tax is a joint
and several tax in that all parties to
the transaction (seller and buyer) are
responsible for the payment of the
tax. Traditionally, the payment is split
between both parties.
Assignments of Agreements
of Sale
The amended regulations provide
that where a party assigns its agreement
of sale to a business entity formed just
before closing, the assignment and the
deed from the original owner are two
separate “transactions”, each subject
to realty transfer tax. This type of
routine assignment is standard practice
throughout the real estate industry,
and until the recent amendment, was
only taxed once upon the transfer of
the deed. Although there may be no
consideration for the assignment, the
double tax will be based on the property’s
actual monetary worth computed
through the use of assessed value
for local real estate tax purposes and
adjusted to the market value.
However, if the newly formed
business entity was created prior to
execution of the agreement of sale, the
assignment from the buyer to the new
entity may not be subject to an additional
transfer tax, as long as the buyer
was acting as an agent and executed the
agreement on the new entity’s behalf.
Consequently, if you are contemplating
entering into an agreement of sale with
the intent of assigning the agreement
to a business entity to be named later,
it will be necessary to form the new
business entity prior to entering into
the agreement of sale; otherwise, pursuant
to the Department, you will be
responsible for two (2) separate realty
transfer taxes.
Additionally, in addressing the
issue of assignments of contracts for
additional consideration, the Department
will be taxing each assignmentas if they were multiple transactions.
For example, in the Bulletin the
Department provides the following
Scenario #4: S and B enter into a
contract for the sale of real estate for
$1,000,000, B gets certain approvals
and then assigns the contract to
C for $2,000,000 for a total purchase
price to C of $3,000,000, and C gets
additional approvals and then assigns
the contract to D for $5,000,000 for
a total purchase price of $6,000,000.
Under this scenario, S ultimately sells
the property to D and only receives
$1,000,000, and the realty transfer tax
was previously only assessed on this
amount. Under the new amended
regulations, each assignment will be
subject to realty transfer tax, resulting
in a realty transfer tax being imposed
on the following “transactions”: (a) the
$1,000,000 transfer from S to D, (b)
the $3,000,000 assignment from B to
C, and (c) the $6,000,000 assignment
from C to D.
Obviously, such an interpretation by
the Department will result in significant
additional taxes to the parties involved,
unless and until they are challenged.
1031 Like-Kind Exchanges
In a traditional forward 1031 Like
Kind Exchange, the taxpayer assigns
its agreement of sale to a qualified
intermediary (“QI”), but direct deeds
the property to the buyer. In a reverse
1031 Exchange, the replacement property
is acquired prior to the disposition
of the relinquished property and is
“parked” with an exchange accommodation
titleholder (“EAT”), who
“parks” the property until the taxpayer
sells the relinquished property. Previously,
the general position was that the
QI/EAT was as an agent for the taxpayer
for realty transfer tax purposes,
and therefore exempt from transfer tax.
However, the amended regulations
include a provision specifically stating
that neither a QI nor an EAT is the
agent of the taxpayer (Regulation §
91.153(d)), which means that transfers
to and from a QI and/or an EAT may
be subject to the realty transfer tax.
Ultimately the Department clarified
in Scenario #5 of its Bulletin that in a
forward 1031 Exchange, it is immaterial
whether the QI is an agent of the
taxpayer since the QI never takes title
to the property. Accordingly, the QI is
viewed as a mere facilitator to the conveyance,
and the assignment does not
result in an additional Realty Transfer
Tax. In a reverse 1031 Exchange, the
EAT acquires and transfers the replacement
property to the taxpayer. Since
the EAT actually takes title to the property,
the deed is subject to an additional
Realty Transfer Tax.
The updates to the Pennsylvania
Realty Transfer Tax Regulations make
only one thing clear . . . there will be
numerous challenges to the Department’s
“guidance” in their explanation of the
double tax.
You may be able to appropriately
plan in advance to address many of the
concerns raised by the Pennsylvania
Department of Revenue’s recent
Amended Regulations. If you have any
questions in connection with your real
estate transaction, the members of the
Real Estate Division stand ready to
assist you.
Jeffrey G. DiAmico is an associate of
Hill Wallack LLP in the Newtown offi ce
where he is a member of the Business &
Commercial Practice Group.
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