Mayor Kenney on May 15 signed into law a bill amending the Philadelphia Realty Transfer Tax as it applies to sales of interests in real estate companies.
Before July 1, 2017, if a real estate company that owned Philadelphia real estate experienced a 90 percent or more change in ownership in a three-year period, the company owed Philadelphia and Pennsylvania Realty Transfer Tax on the computed value of its Philadelphia real estate. Computed value of Philadelphia real estate is its assessed value for real estate tax purposes multiplied by the common level ratio factor (CLRF) for Philadelphia. Since AVI, the Philadelphia CLRF has been close to 1.00; and currently it is 1.01.
Effective July 1, 2017, Philadelphia law changed. Instead of imposing Philadelphia Realty Transfer Tax when a real estate company experienced a 90 percent or more change in ownership in a three-year period, transfer tax is imposed when a real estate company experiences a 75 percent or more change in ownership in a six-year period. At the same time, the Philadelphia Realty Transfer Tax base, in the case of a bona fide sale of interests in a real estate company, also changed. Instead of computed value, the Philadelphia Realty Transfer Tax base was presumed to be “actual consideration” paid for the interests in the real estate company, i.e., the equity value of the company. (No comparable changes were made to the Pennsylvania Realty Transfer Tax.)
The City seems to believe that assessed values for Philadelphia real estate are so unreliable that, in the new law, Philadelphia City Council calls computed value a “loophole.” Council also apparently believes the term “actual consideration for the interests in the company” should mean something other than equity value. To rectify both of these perceived abuses, effective May 15, 2019, the new law states that the term “actual consideration” includes any liens or encumbrances on the real estate existing before the transfer and not removed by it.
This change clearly is an effort by the City to cause mortgage debt owed by a real estate company to be included in the Philadelphia transfer tax base in the case of a bona fide arm’s length sale of the company's interests. Because the bill leaves in place the language that creates the presumption that, in the case of a taxable bona fide arm’s length sale of interests in a real estate company, the transfer tax base is the actual consideration paid for the company, it is unclear whether liens on the real estate should be included in determining the tax base. Time will tell whether the City accomplished its goal.
If you have any questions about Philadelphia or Pennsylvania Realty Transfer Tax, please contact Wendi L. Kotzen or Philip B. Korb.
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