United States

Philadelphia city council passes realty transfer tax bill

Addresses loopholes in purchases of real estate holding companies

TAX ALERT  | 

On Dec. 8, 2016, the Philadelphia City Council unanimously passed Bill No. 160810, providing adjustments to the Philadelphia realty transfer tax in an attempt to close perceived loopholes that allowed buyers and sellers of real estate to avoid or lessen the realty transfer tax liability. The bill has been transmitted to Mayor Jim Kenney for signature.

Typically, high-value commercial real estate transactions are planned to specifically take advantage of the lower tax base provided for under the city’s current real estate transfer tax law. Buyers of commercial real estate regularly purchase real estate holding companies rather than directly purchasing the underlying real estate. Under this purchase arrangement, the tax collector is not privy to the actual fair market value of the property since the real estate company is purchased, not the real estate itself. As a result, the transfer tax is imposed on the property’s historical assessed value—a value often much less than the actual fair market value of the property.

To address these types of transactions, the bill amends the definition of ‘value,’ which serves as the transfer tax base, and the definitions of ‘real estate company’ and ‘acquired real estate company’ with the intent to ensure that transfer taxes are more accurately assessed on the value of the real estate. Accordingly, the bill limits the value to not ‘less than the readily ascertainable market value of any property’ and provides a rebuttable presumption that the monetary value subject to the transfer tax is the actual consideration paid for the acquired real estate company. Therefore, the tax base of real estate transferred through an acquisition of a real estate holding company could be significantly higher than under the prior law, unless, the parties provide a fair market valuation to rebut that presumption.

Additionally, both the state and Philadelphia realty transfer taxes are imposed on the transfer of 90 percent or more of a real estate company within a period of three years. Historically, this is known as an ‘89/11 transaction.’  For purposes of the Philadelphia realty transfer tax, the bill amends the definition of acquired real estate company to lower the taxable threshold to the transfer of only 75 percent or more of the ownership interest of a real estate company within a period of six years, as opposed to only three years for the state tax. 

The changes in the bill become effective for transactions taking place on or after July 1, 2017. It should also be noted these amendments are only applicable to the Philadelphia realty transfer tax and have no impact on state or other local municipality transfer taxes.

Takeaways and next steps

It is currently anticipated that the unanimously approved bill will become law. Owners of real estate located in Philadelphia should consider the effective date of these amendments, July 1, 2017, when planning future transactions and speak to their tax advisors on whether and how the bill’s changes will impact those transactions. Finally, taxpayers should keep in mind that the Philadelphia real estate transfer tax rate is scheduled to increase to 3.1 percent from 3 percent beginning on Jan. 1, 2017, for a combined city and state realty transfer tax rate of 4.1 percent.

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