Pennsylvania Transfer Tax on Assignment Transactions
By Marc Shaw
This is a continuation of our series of posts on Pennsylvania Transfer tax and the “unusual transaction”. As a reminder the PA Realty Transfer Tax is imposed at both the state and the local level on the value of transferred real estate and on the value of acquired real estate companies. Today we will discuss “Assignments”.
Assigning Agreements of Sale
In 2007 when the Pennsylvania Department of Revenue made sweeping changes to the PA Transfer Tax regulations, one of the larger changes was the Departments position on “flipping” an agreement of sale. The changes crated an effect that a PA Title Company would need to collect transfer tax in excess to the amount dues based on the deed. Hence, very similar to the Relocation Transaction Post from last week.
Example: if Joe agrees to purchase real estate from Sally for $100,000, and Joe “flips” the agreement of sale by assigning it to William for $125,000, the deed from Sally to William results in two transfer taxes: The first is on the $100,000 consideration for which Joe and Sally are liable, and another on the $125,000 consideration where Joe and William are liable.
Changing Ownership from Individual to Company
Example 2: Joe owns real estate. Sally wants to purchase Joe’s real estate for use in a business venture. Sally enters into agreement of sale with Joeto purchase the property for $300,000.00. Sally intends to take title in her own name. Sally purchases the property with no mortgage. At settlement, through a PA title company Sally pays Joe the $300,000.00 and Joe deeds the property over to Sally. After operating the business for a short time period an attorney advises Sally to change the ownership of the property to her company Sally, LLC. in order to shield Sally from any personal liability. Sally’s attorney files the deed with a Pennsylvania title company in order to record the documents.
The result is transfer tax not only on the original purchase of $300,000.00 from Joe, which is split between buyer and seller. But Sally will also be faced with transfer tax on the transfer of ownership to her company, Sally LLC. The deed on the 2nd conveyance would be subject to transfer tax based on the Common Level Ratio multiplied by the Tax Assessment multiplied by the applicable transfer tax amount in that particular municipality.
The Common Level Ratio break down can be found at the bottom of the Frequently Asked Questions page. Using Montgomery County as an example with a Tax Assessed Value by the Municipality’s tax assessors office of $115,000 we would get the following result as of Feb, 2012.
1.72 * 115,000.00 * 2% = $3,956
Hence, not only would Sally pay 1% on the original purchase ($3,000.00) but she would also be faced with transfer tax again at $3,956.00 in the conveyance to her company.
If Sally had consulted with her attorney upfront she would have made sure the initial purchase deeded the property to her company which would have saved her a boat load!
Changing Ownership of Company through Entity Ownerhsip
Say for example, Sally, LLC owns a piece of land that Joe, LLC is interested in building homes on and makes an inquiry. Joe, LLC offers Sally, LLC $250,000 for 50% ownership in the company Sally, LLC. What is the net result?
Well again, this comes down to municipality and the actual common level ratio. But to keep things as simple as possible the rule here is that there is transfer tax based on the common level ratio on 50% of the conveyance. So yes, although there is no Deed being recorded and it is a mere sale of a % of an entity, since land was the underlying asset PA Transfer Tax comes into play. A PA Realty Transfer Tax Declaration of Acquisition is used. The form gets filed with the State anytime a company that is purchasing real estate through the ownership of another entity is taking place.
There is often significant confusion and uncertainty to the application of the Pennsylvania Realty Transfer Tax to many real estate and business transactions. The PA Department of Revenue put out a Bulletin in January of 2008 which presents many examples with different variables. The answers located in the Bulletin offer some clarity, but create additional confusion in an already very foggy area of Pennsylvania tax law. As always any questions feel free to call our offices at any time and we will steer you in the right direction!