For those Pennsylvania based investors and legal experts out there I was wondering if you can provide some guidance on the situation below:
If I purchased a multi-family property in my name, then transfer the property into an LLC that is solely owned by me after the sale, would I need to pay another transfer tax to the tune of the same transfer tax I incurred at closing on the property? Would this transfer be exempt from the tax in PA? I believe some states have different laws when it comes to this.
Thanks for the help!
Jason & @Jake Lord
You will have to pay another transfer tax.
Since this is not an arm’s length sale of the property, the transfer tax would be based on the value as determined by a formula that the PA Department of Revenue uses. That formula takes the property’s assessed value from the tax assessor, multiplies that by a factor that can be found at the PA Department of Revenue website, and then multiplies that value by the transfer tax percentage that is in effect for the property’s location, giving you the transfer tax that is due.
That method could result in you having to pay an even higher transfer tax if you bought a property well below market value.
Unfortunately you won't be able to get out of paying the transfer tax. The transfer of property from your personal name to an LLC, even if that LLC is 100% solely owned by you, would not qualify as exempt from the realty transfer tax. You will pay 1% of the real estate transfer tax to the Commonwealth of Pennsylvania and 3.278% to the City of Philadelphia. In a normal transaction the buyer and seller split the transfer tax, but since you are transfer it to the LLC you will be hit with the full 4.278%. I've spent a lot of time and legal effort to try to get around this, but you just can't. I did assume that your property is in Philadelphia, but if the property is outside Philadelphia County then you obviously won't pay the City portion of the transfer tax.
Depending on how long it has been since you purchased in your own name you can calculate your transfer tax due in one of two ways. If you recently bought the property you would calculate the transfer tax owed based n the sales price. If it has been awhile since you bought the property, then you can go onto the City's web site and look at the assessed value. You take that assessed value thats listed on the department of records website and multiply it by 1.06 (this is the current market factor used) and the resulting value is the fair market value. Then apply the transfer tax %'s to this fair market value and that will tell you how much transfer tax you owe.
One other thing to consider is that if you have a mortgage on this property, check with your lender because it could trigger a due-on-sale clause and they could call the mortgage due when you transfer this to the LLC. I ran into this issue and that's why I decided to use a Land Trust instead of an LLC. The Land Trust is protected by the Garmen St Germain Act and your mortgage company can't call your loan due. You get the benefits of anonymity with the Land Trust and you can further solidify your asset protection strategy by having the beneficial ownership interest in the Trust owned by let's say a Nevada or Wyoming Holding LLC.
Transfer tax in Philadelphia in particular makes moving properties into LLC's a very high cost of doing business and I think a lot of people end up choosing to keep the property in their own name and just have a good umbrella insurance policy. It really comes down to what you are comfortable with from an asset protection standpoint.
Since Pennsylvania’s idea of a land trust is an instrument that is used to have land in a conservation status, any use of a trust for this will require the PA income tax to be filed as a business trust. Consult with your attorney and CPA before going down that path, so that you understand how this works.
And for trusts, the trustee is typically going to be named on the deed as the owner, see link;
@Steve Babiak @Chris McTyre Agree 100%, the Department of Revenue is very aggressive in collecting this tax. And add to this the corona virus, and Tax Revenue are down, so they are more aggressive in collecting taxes.
@Jason Prignoli Big lesson learned don't do that again, instead make your initial purchase in the name of the LLC and save the Double transfer Tax that you will have to pay.
Here, in PA. the law says that you owe transfer tax is you "buy" the property like in a wholesale and don't transfer the deed until the end buyer. In that case you will also have to pay Double Transfer tax.
Got it, super helpful everyone. The tradeoff then becomes taking commercial loans out compared to conventional rates. In theory, you can get a strong insurance policy and keep the asset in your name to take advantage of the low rates compared to commercial? If my line of thinking is off, let me know!