2014 Brings Changes In Pennsylvania Realty Transfer Tax

by Pepper Hamilton LLP

Act 52 of 2013 amended many provisions of Pennsylvania state taxes, including some relatively minor changes to the realty transfer tax that took effect on January 1, 2014. The most significant change to the realty transfer tax is the expansion of the definition of a “real estate company.” The concept of a “real estate company” was introduced in 1984 to make the realty transfer tax payable on real estate owned by an entity primarily engaged in the ownership of real estate, when the parties transferred ownership interests in the selling entity instead of recording a deed to the property being conveyed. The term “real estate company” was defined as any entity primarily engaged in the business of holding, selling or leasing real estate, in which 90 percent or more of the ownership of the entity is held by 35 or fewer persons and which entity either derives 60 percent of its income from the ownership or disposition of real estate or holds real estate, the value of which is 90 percent or more of its tangible assets. That definition is now expanded in two ways.

The first change to the definition of “real estate company” involves the definition of “real estate,” for determining whether the ownership or income requirements set forth above are satisfied. Originally, “real estate” only included real property in Pennsylvania. That limitation has been removed, so now in determining whether an entity is a “real estate company,” all of the entity’s real estate must be considered, wherever it is located.

The second, and probably more significant change, adopts a provision that has been used by the City of Philadelphia in its transfer tax ordinance. This provision expands the definition of a “real estate company” to cover any entity that otherwise does not itself qualify as a “real estate company,” if it owns 90 percent of an interest in another company that is itself a “real estate company.” The purpose is to eliminate the ability to avoid the real estate transfer tax on the sale of a tiered entity, one of which is a “real estate company.”

Another change to the realty transfer tax involved the fine-tuning of the definition of an “acquired real estate company.” In 2013, the Commonwealth attempted to eliminate the practice of avoiding the tax imposed on the transfer of more than 90 percent of the ownership interests in a “real estate company” in any three-year period, by transferring 89 percent of the ownership interests currently and the remaining 11 percent after the three-year period had ended. As we previously reported, a change effective on January 1, 2013 stated that a transaction would be deemed to have occurred within the three-year period (and thus be subject to tax) if during the three-year period three conditions were met:

(i) the transferring party provides a legally binding commitment, enforceable at a future date, to execute the transfer

(ii) the terms of the transfer are fixed and not subject to negotiation, and

(iii) the transferring party receives full consideration, in any form, in exchange for the transfer.

The Commonwealth has condensed the three conditions to one – “the transferring party provides the transferee a legally binding commitment or option, enforceable at a future date, to execute the transfer.” In essence, any option to sell will be treated as having been exercised within the three-year period.

Finally, Act 52 added a new exclusion from the realty transfer tax that benefits volunteer emergency medical services agencies, volunteer fire companies, and volunteer rescue companies. (Each of the foregoing three terms has a statutory definition.) The new excluded transactions are transfers to those volunteer groups for no or nominal consideration from the Commonwealth or any of its instrumentalities, agencies or political subdivisions or transfers between two or more of such volunteer agencies.

A copy of Act 52 can be found at http://www.legis.state.pa.us/CFDOCS/Legis/PN/Public/btCheck.cfm?txtType=PDF&sessYr=2013&sessInd=0&billBody=H&billTyp=B&billNbr=0465&pn=2211
&sessYr=2013&sessInd=0&billBody=H&billTyp=B&billNbr=0465&pn=2211. The provisions affecting the realty transfer tax are in Section 24, which begins on line 24 of page 64.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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