January 1, 1900

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.