May 6, 2016
Although parties to both commercial and residential real estate transactions may find themselves burdened with yet another expense associated with the purchasing or selling of real estate in Pennsylvania, there may be relief for some.
As previously highlighted, parties to real estate transactions in Philadelphia are subject to a state transfer tax of 1% and a county transfer tax of 3%. However, both Philadelphia and Pennsylvania exclude certain parties and transactions. Unfortunately, the exemption for certain parties does not benefit the everyday real estate developer or homebuyer. Both Philadelphia and Pennsylvania exclude parties such as the federal and state government as well as an instrumentality, agency or governmental body of either. In addition, real estate transfers made to an excluded party do not mean that the transferring party is also exempt. In fact, a party that is not excluded is required to pay the entire amount of the transfer tax. Although the parties may contractually agree to split the real estate transfer tax, if the tax is not paid, the party not excluded from transfer tax will be fully responsible for the transfer tax.
Philadelphia transfer tax law excludes 28 transactions, while Pennsylvania transfer tax law excludes 34 transactions. Common transactions that are excluded from real estate transfer tax include: transfers to an excluded party by gift or dedication, confirmation deeds, correctional deeds, transfers between certain relatives, transfers between certain non-profits, and transfers of co-op interest. However, such transaction must also meet certain requirements.
For example, under both Philadelphia and Pennsylvania real estate transfer tax law, a confirmation deed is excluded from real estate transfer tax. However, the deed must be made without consideration, previously recorded, and intended for the sole purpose of confirming an ownership interest in property. A common example includes a deed to confirm a party’s ownership interest in property held as joint tenant with right of survivorship with a party that has since deceased.
Both Philadelphia and Pennsylvania transfer tax laws also exclude correctional deeds from real estate transfer tax if such a deed is made solely for the purpose of correcting an error as to the description of the parties or the property being conveyed. In order for a correctional deed to be excluded from tax, the deed must convey the same property interest as in the original deed, the parties must have treated the property interest conveyed in the correctional deeds as that of the grantee, and the parties, at no time since the original deed, treated the property interest described in the original deed as that of the grantee.
There are also transactions between certain relatives that are excluded from Philadelphia and Pennsylvania transfer tax. They include real estate transfers between: a parent and child (including child’s spouse), grandparent and grandchild (including grandchild’s spouse), siblings (including the sibling’s spouse), husband and wife, and divorced spouses. What one might notice is that none of these relationships include transfers between uncles/aunts and nieces/nephews or cousins. While transfers between spouses are excluded from transfer tax, the transfer must be pursuant to a divorce decree.
In addition, under Pennsylvania real estate transfer tax law, transfers between a stepparent and a stepchild (including step-child’s spouse) are also excluded from transfer tax, while such transfers are not excluded from Philadelphia real estate transfer tax.
Another distinction, are the classifications of family members. The Philadelphia real estate transfer tax law explicitly excludes transfers between life partners (meeting the requirements a life partnership under the Philadelphia Code) from real estate transfer tax. However, while the Pennsylvania transfer tax law does not explicitly list life partner’s ,the law also protects same-sex marriages under the definition of husband and wife. Another unique class excluded from transfer tax under the family member exclusion of the Philadelphia real estate transfer tax law financially interdependent individuals. Such distinctions can easily lead to confusion as to the proper classifications of certain parties.
In an effort to support affordable housing and non-profits, Philadelphia also has specific exemptions for transfers involving non-profit housing corporations incorporated by the City, certain transfers to and from non-profit housing organizations. For example, Philadelphia excludes the imposition of real estate transfer tax on both parties when there is a transfer of property to a non-profit housing corporation, such as the Philadelphia Housing Authority. In addition, transfers to and from a non-profit housing organizations that renovates real estate and subsequently transfers the property to a person meeting certain income requirements is excluded from real estate transfer tax. These exclusions may be of particular importance to real estate developers and non-profit entities seeking to develop within Philadelphia. For projects involving non-profits, where funds are tight, entities look to save money wherever they can.
Regardless of whether you are a real estate developer, non profit, or individual interested in commercial or residential real estate in Philadelphia, real estate transfer tax can not be ignored. When dealing with real estate transfer tax law it is important to consult a real estate lawyer who is aware of the many distinctions between both Philadelphia and Pennsylvania transfer tax law.
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The information above is general: we recommend that you consult an attorney regarding your specific circumstances. The content of this information is not meant to be considered as legal advice or a substitute for legal representation.