Avoid double transfer tax?

Question

I am trying to get to the bottom of this... Have not found a solution on the forums. I want to avoid double transfer tax in PA for a wholesale deal. I was told by a title company that I can use a novation agreement at the closing table to replace the original contract. I was told in the novation agreement there would be an assignment fee, I should not call it an assignment fee (not sure what other option there is... maybe transfer fee?). I wanted to know if anyone had feedback on this.

Tom Gimer · Answer

@Chris Springer You don't need to double close. The title company can collect all applicable transfer taxes on a transaction involving an assignment (or multiple assignments) and submit a Form REV-183 for each.

In my opinion, yes, it's inevitable if everyone involved is playing by the current rules.

Tom Gimer · Answer

@Chris Springer So here's the problem with PA... Under the holding in Baehr Bros, it's not the transaction's form that dictates whether and how the realty transfer tax is due, but rather its substance. PA put a lengthy bulletin out on this subject in 2008 (search for PA Realty Transfer Tax Bulletin 2008-01). It's full of sample fact patterns and is a must read.

So if you structure the deal with a repudiation of the original purchaser's obligation plus a novation by the end buyer but with some sort of disguised assignment fee included, the court could eventually look back at the transaction in its entirety and treat it not as one A-->C event but rather as an A-->B plus a B-->C. And guess who is liable for the various taxes that should have been collected... everybody involved! The seller and wholesaler would be jointly and severally liable for the tax on the A-->B (yes, the deal that didn't close) and the wholesaler and end buyer would be jointly and severally liable for the tax on the B-->C. No fun! Most end buyers, if they are aware of PA law, don't want to be assuming the potential liabilities of wholesalers.

If you've actually found someone who can take a basic wholesale deal in PA and structure it in such a way that there is zero chance of potential future liability, I would be surprised... but would also be very happy to hear about it.

Chris Springer · Answer

@Tom Gimer Thanks! So it sounds like the proper way to truly do it is to have a double close, and just buck up and pay the double transfer tax because it's inevitable.