Pennsylvania has closed a loophole used to avoid paying the realty transfer tax. For years, buyers and sellers of commercial real estate have avoided the realty transfer tax by using a type of transaction known as an 89/11 transaction.

These transfers work in a few steps. First, the buyer and seller transfer 89 percent interest of a partnership or business entity that owns real estate on the day of a closing. Then, three years and a day later, they transfer the remaining 11 percent of the partnership interest. This way, the buy and seller get around the rule holding that once 90 percent or more of a property-owning partnership is sold, the transaction is treated as if the property were entirely sold and is therefore subject to the tax.

Governor Tom Corbett recently signed a law intended to close this loophole.

“It’s obviously an attempt to restrict if not eliminate the use of certain structures to avoid transfer tax,” said Philip B. Korb, a real estate attorney with Ballard Spahr. “I don’t believe it will eliminate all 89/11 structured transactions but some of them.”

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