A recent change may affect the parties to certain real estate transactions with respect to property located in Philadelphia County, Pennsylvania, that took place on or after July 1, 2012.
Every year, the Pennsylvania State Tax Equalization Board (STEB) establishes a common level ratio (CLR) of assessed value to market value of real estate for each of Pennsylvania's 67 counties for the prior calendar year, which are to be issued by the July 1 effective date. In 2012, the CLR for Philadelphia County was not established until December 2012, and was published in early January 2013. Prior to that time, the previous year's CLR of 25.2 percent was used. The recently published CLR for Philadelphia County, effective July 1, 2012, through June 30, 2013, is 30.6 percent.
The reciprocal of the CLR, called the common level ratio factor (CLRF), is used to calculate the market value in certain types of real estate transactions, such as foreclosure sales; sales that are not on an arm's length basis; and leases of 30 years or more. In such cases, the property's assessed value is multiplied by the CLRF, creating a "computed value," and the realty transfer tax is calculated based on that value.
As a result of the change in the CLR, the CLRF for Philadelphia applicable to transactions from July 1, 2012, through June 30, 2013, has decreased from 3.97 to 3.27. Accordingly, taxpayers in certain real estate transactions in Philadelphia County who paid realty transfer taxes based on computed value from July 1, 2012, which had been calculated at the higher rate, are entitled to a tax refund.
By way of example of the potential tax refund, if a property was purchased at a Philadelphia sheriff's sale for costs in August 2012 and the property had an assessed value of $100,000, using the then-applicable CLRF of 3.97, the computed value of the property would be $397,000 and the 3% Philadelphia realty transfer tax owed would be $11,910. In comparison, the Philadelphia realty transfer tax owed using the revised 3.27 CLRF would be $9,810—providing for a tax refund of $2,100. In most cases, a transfer to a foreclosing mortgagee would have been exempt from the 1% state transfer tax. Where the transaction did have an exemption from the 1% state tax, a taxpayer would be entitled to recover from the Commonwealth the excess of the state tax paid at the higher CLRF over the reduced CLRF.
For Further Information
If you have any questions about this Alert, please contact Brett L. Messinger, Louise S. Melchor, David R. Augustin, George J. Kroculick, any member of the Real Estate Practice Group or the attorney in the firm with whom you are regularly in contact.