Philly Realty Transfer Tax (x2) when buying from a wholesaler?

23 Replies

As we already know when you buy and sell property in Philadelphia, there is a transfer tax you have to pay that comes out to about 4.2% of the purchase price of the property. https://beta.phila.gov/services/payments-assistanc...

What I'm wondering from the Philly group here is what your experiences have been with using wholesalers and assignment of contracts of sale, and how that worked with the transfer tax. I've read the bulletins and guidance that with assignments, that is considered a transaction that triggers the transfer tax being due (again). But also read some guidance that says you wont have to pay it twice if the assignment ends up being with your LLC as the buyer and you go to closing and you in fact are that LLC on the assignment contract.

So basically, wanted to start a thread not just for me but for others in the group if you run into this, what has been your experiences with transfer tax in Philly when it comes to this? Have you had to pay the transfer tax more then once as a buyer when buying from a wholesaler? Do you have any good links you can share that explains this better? Here are some links that I have that helped me with my research:


Anecdotally I have heard the same thing from my title company. Rather than assigning from one entity to the other we rewrote our AOS in the new entity name (not a wholesale, just an entity change mid-purchase).

Interested to hear others experiences.

@Mauricio Botero

I've done a few assignments of the properties that I purchased. Never heard this before. You pay transfer tax only when you are transferring property (changing ownership). Even if you are transferring property from your name to your company (or between your companies) or vise vera you still pay transfer tax.  However, assignment of the agreement of sale has nothing to do with actual sale and transferring of ownership. And you should not pay transfer tax at assignment no matter who is transferring (LLC or a person).  You should ask this questing your title company. 

Originally posted by @Yuriy Skripnichenko :

@Mauricio Botero

I've done a few assignments of the properties that I purchased. Never heard this before. You pay transfer tax only when you are transferring property (changing ownership). Even if you are transferring property from your name to your company (or between your companies) or vise vera you still pay transfer tax.  However, assignment of the agreement of sale has nothing to do with actual sale and transferring of ownership. And you should not pay transfer tax at assignment no matter who is transferring (LLC or a person).  You should ask this questing your title company. 

Unfortunately, the PA Department of Revenue does not take the position that you posted; the PA Department of Revenue has published their position as given in the OP.

Now, it could be that the title company you used to close with the assignment decided to ignore the PA Department of Revenue's rules to collect that extra transfer tax. But they do audit closings to see if the correct transfer taxes are being paid, and when they audit they ask the buyer, seller and title company to explain the transaction, even requesting a copy of the agreement(s). Sort of like running a traffic light changing from yellow to red  - OK as long as nobody catches you doing it.

@Steve Babiak

It's good to know. Thanks. I used 2 different title companies and neither mentioned anything about it. When did they start doing it? Last I did assignment was February this year.

What's the best way to go around this? Just make a new AOS with a new buyer's name? 

This rule has been in place for a number of years now; it looks like around 2008 - that number shows up in some of the links in the OP. I don't recommend any one method to circumvent. I always suggest that people look at the transfer tax form and rules to identify the transactions that are exempt from transfer taxes, and to then try to structure things to fit into an exemption where possible.

@Yuriy Skripnichenko

Any Pennsylvania transactions involving assignments need to get reviewed carefully to see what the realty transfer tax consequences are. This is true in wholesaling contexts and in contexts where people assign the contract from their personal name to an LLC (vice versa). To fully appreciate the current landscape on this, you'll need to review the 2008 memo from the PA Department of Revenue, a PA Supreme Court case called Baehr Bros, and PA Supreme Court case called Allebach.

A quick note about the confusion on these topics:

  • If you work on larger projects (say +$1 million), you really start paying attention to these issues since the transfer tax consequences can be in the six to seven figures. In cases where there's reasonable disagreement on what the transfer tax consequences are, what most folks do in that scenario is to pay the taxes "in protest" and then file an appeal. Often times the taxpayers and the Department of Revenue end up settling during the appeal process. From the taxpayer perspective, that allows them to save money. From the Department of Revenue perspective, they also collected some money and avoid risking the Commonwealth Court or the PA Surepem Court ruling against its interpretation.
  • When you deal with "smaller" projects, people tend to pay less attention because: (1) the damages are low; and (2) the issues are complicated. If you get burned, you remember it and are careful moving forward. But the Department of Revenue cannot realistically check every single transaction. So people can get away with it for a while --- even if you are a title company.
  • What I don't get are people who just outright lie about this. For example, the Form REV-183 expressly asks if the underlying transaction involved an assignment or a relocation. Why check "no" if the answer is "yes"? Is the possible savings worth a possible tax evasion charge? 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Originally posted by @Nick Glatzer :

Would the City of Philly have the same rules on contract assignments as PA state?

@Steve Babiak

It's the PA Department of Revenue that created this statewide. And they don't care which party to a transaction pays the transfer taxes, just as long as the taxes get paid.

Originally posted by @Nick Glatzer :

@Steve Babiak , understood. Questions is, if the City audits could they impose tax on the assignment?

I have seen the PA Department of Revenue perform audits on transactions, looking for more transfer taxes to be paid. The tax on the assignment is due according to the PA Department of Revenue so it is supposed to be imposed, and any audit could seek to collect if it was omitted.

Does the City of Philadelphia perform such audits? I don't have that information one way or the other. But the amounts are often big enough to make it worth the effort. And then there are transactions like one a buddy talked to me about last week, under contract for $12K and end buyer paying $17K - the roughly $500 in extra transfer taxes weren't worth the extra effort to avoid, given that spread.

I've encountered this a few times in a commercial context. In one deal where we knew we were going to assign the agreement to an LLC from the start, we added explicit language to that effect in the agreement of sale as a workaround the double transfer tax. In another deal where the buyer decided at the last minute to hold the property in an LLC, we did a novation of the Agreement of Sale.

Gotcha, yeah the city has no intentions to charge transfer tax between 2 entities that are operated by the same people. 

Outside of that, the city will charge a 1% transfer tax per assignment, but that is only if it is enforced by the title company

I know this is an older thread, but I have question on the same lines. I am buying my second property in Philadelphia, both assignments. The first one had no fees relating to the tax on the assignment value. The second one (different title company) now has a 4.2% fee relating to the tax on the assignment. I understand this is the correct way for it to happen. A couple of questions:

1 Presumably this should be paid for by the people who are getting the assignment fee?

2 Should I do anything about the previous transaction, if the title company get audited, who will the PA tax & revenue go after, me or the wholesaler?

Thanks in advance

Originally posted by @Paul Nicklin :

I know this is an older thread, but I have question on the same lines. I am buying my second property in Philadelphia, both assignments. The first one had no fees relating to the tax on the assignment value. The second one (different title company) now has a 4.2% fee relating to the tax on the assignment. I understand this is the correct way for it to happen. A couple of questions:

1 Presumably this should be paid for by the people who are getting the assignment fee?

2 Should I do anything about the previous transaction, if the title company get audited, who will the PA tax & revenue go after, me or the wholesaler?

Thanks in advance

Pennsylvania does not care who pays the transfer taxes - the state just wants them to be paid.

The one audit letter I saw, was addressed to all parties including the title company. I guess they can get a judgment against anybody involved if they catch this. Don't know for certain.


 

FWIIW, my title company has even wavered on their own policies. Originally (prior to me doing any wholesale transactions) they said they would only do double closings due to the interpretation of both parties needing to pay the transfer tax. Then their lawyer operator left and was replaced and low and behold I was able to do single closings. So yeah, I basically understand it as both parties should pay, but enforcement is loose and if you are buying small properties there is low chance of getting caught due to a small fish/big pond scenario.  

@Paul Nicklin

It's a bit more complicated than assuming that every wholesaling transactions are automatically double taxed. I don't have it in front of me, but the PA Department of Revenue published a special tax bulletin on this very exact question. You should be able to find it by Google. It lays out the different scenarios that can result. 

In terms of who pays, @Steve Babiak is correct the PA Department of Revenue does not care who pays it. But if you review that bulletin, you can see some examples of how the tax obligations are divided. Do note that the underlying contracts between you, seller, and the wholesaler may say otherwise. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@David Lee Hall, III

You are probably right that the Department of Revenue cannot realistically audit every transaction. So I assume many wholesale transactions can get away with it. 

The real issue is the potential penalty. It's been a while since I looked at this side of the law, but there is basically no time limit on when the Department of Revenue can come after the parties for the unpaid realty transfer tax. And the penalties for failing to pay is pretty high (something like 10% to 20% upfront and 1% monthly compounding interest thereafter). So for every transaction where there are unpaid realty transfer taxes, there is a silent debt that is growing at a quick pace. And in theory, they can come after you long after you retired as a successful investor.

This is one reason why people voluntarily pay these taxes. Back when I practiced more, the issue that real estate lawyers had to do was acquisitions of "real estate companies." For a long time, major developers tried to avoid real estate transfer taxes by buying the holding entity (e.g. LLC that owns the building) instead of the building itself. Over the years, the PA Department of Revenue changed the law and its interpretation of the existing law to go after these transactions. In these transactions, the parties are expected to voluntarily report to the PA Department of Revenue.

Now like the wholesaling example, it is possible to get away by not reporting the taxable event to the PA Department of Revenue. The problem, however, is the penalty. For major deals, the penalties alone can be in the millions and can have major consequences for the non-reporting party (e.g. the lender or tenants declaring breach, etc.). It's just not worth the risk.

One last thought: your story is one reason why I generally prefer attorney-owned title companies. It's not so much that attorneys are inherently more honest (insert your own lawyer jokes here). It's just that they have more to lose if they do not handle a deal correctly. For example, failure to advise the transacting parties about paying realty transfer taxes can have serious consequences for lawyers. It could lead to malpractice claims and it could even lead to disbarment if they knowingly fail to advise them on it. Criminal penalties are not outside the realm of possibility depending on how egregious the conduct was. 

Now this is not to say that non-attorney-owned title companies won't face liability as well if they make a mistake or engaging in fraudulent conduct. But the stakes are different. Even a disciplinary record can have serious consequences for lawyers when it comes to making a living. It's like a scarlet letter that we must wear for the rest of our lives and it's in the public record forever.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Chris K. Thanks for the advice, I googled the PA revenue site and a couple of title company websites. I didn't quite understand why I would be expected to pay for 50% of the original transfer tax and then 100% of the assignment part. Going to get the HUD adjusted.

@Paul Nicklin

Here's the link to the tax bulletin: 

https://www.revenue.pa.gov/GeneralTaxInformation/TaxLawPoliciesBulletinsNotices/TaxBulletins/RTT/Documents/rtt_bulletin_2008-01.pdf

I would take a look at it if you are interested in the topic. I think Scenario 4 is most applicable to your situation. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.