Philadelphia just dramatically tightened its realty transfer tax rules to impose more realty transfer tax. Under the current Philadelphia and Pennsylvania realty transfer tax law, a real estate company owes realty transfer tax on the computed value of its real estate if it experiences a 90% or more change in its ownership in a three-year period. The Pennsylvania realty transfer tax rate is 1% and the Philadelphia realty transfer tax is 3% until December 31, 2016, and 3.1% thereafter. In Philadelphia, computed value is based on and approximately equal to (currently 102% of) the assessed value of real estate for real estate tax purposes. The very high realty transfer tax rate has inevitably led to techniques for reducing or avoiding the tax, such as so-called 89-11 transactions, in which less than 90% of the ownership interests in a real estate company are sold, or the transfer of ownership interests in a real estate company instead of the real estate itself if the real estate tax assessment is significantly lower than the actual value of the property.

Philadelphia City Council just enacted several changes to the Philadelphia realty transfer tax rules as they apply to real estate companies, effective July 1, 2017. The bill passed by City Council is awaiting the Mayor’s signature. These changes do not affect the Pennsylvania realty transfer tax rules, which remain unchanged.

  • A real estate company will owe realty transfer tax on its real estate on a change of 75% or more of its ownership in a six-year period, instead of a 90% or more change in its ownership in a three-year period.

  • In an apparent nod to the press reporting that many commercial properties are under-assessed by the Philadelphia Office of Property Assessment, the realty transfer tax base in the case of an arms-length sale of interests in a real estate company will be presumed to be the consideration for those interests, instead of the computed value of the Philadelphia property.

  • The definition of the term “real estate company” is a bit complicated, but essentially a real estate company is a company primarily in the real estate business that owns primarily real estate. Another change made by City Council is to include real estate leased under a long-term lease (more than 30 years) in the definition of real estate to determine if a company is a real estate company.

In addition to these changes affecting real estate companies, City Council also changed the rules applicable to the Philadelphia realty transfer tax base when Philadelphia real estate is sold or exchanged and the consideration includes property with a readily ascertainable value. Currently, the Philadelphia realty transfer tax base is computed value when the consideration for a sale is property other than cash or debt assumption, for example an interest in an entity. This rule has been changed so that the realty transfer tax base cannot be less than the sum of any cash, debt assumed or taken subject to, and the value of property with a readily ascertainable value. This change also is effective July 1, 2017. 

If you have any questions about these changes and their impact on existing or future transactions or the issues raised by City Council’s apparent concession that Philadelphia real property is not always assessed accurately, please contact Wendi L. Kotzen at kotzenw@ballardspahr.com or 215.864.8305, or Philip B. Korb at korb@ballardspahr.com or 215.864.8709.


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