Philadelphia Tightens Realty Tax Law for Transfers

Per current realty transfer tax laws, real estate companies must pay a tax on the computed overall value of its real estate any time it has a 90% or more change in ownership in a three-year timeframe. The state tax rate is 1% of that overall value, and the Philadelphia city rate is currently 3.1% - up from 3% last year.

Figures to Remember

Per the city of Philadelphia, a company’s computed value is based on the assessed value of real estate for tax purposes. It’s a high tax rate when compared to other parts of the country, and many people utilize some techniques to reduce or avoid it. For example, some companies limit their sales to 89% of their ownership, thus ensuring that they don’t surpass the 90% limit. Other companies will transfer the ownership interests in a real estate company instead of the actual property if the assessment is lower than the property value.

Changes Effective July 1, 2017

The Philadelphia City Council made several changes to the realty transfer tax rules and the way they appeal to real estate companies. These will go into effect on July 1, 2017, and they will not have any effect on the state’s individual realty transfer tax codes.

  • Rather than owing realty transfer taxes if 90% of ownership changes in a period of three years, real estate companies will now owe taxes if 75% of their ownership changes over the course of six years. This will make it more difficult for companies to avoid the tax by limiting changes of ownership.
  • Instead of using the computed value of the Philadelphia property as a baseline value upon which the tax is assessed, the transfer tax base on a sale of interests in a real estate company will be based on the consideration for those interests. This will help reduce discrepancies based on underassessment.
  • Changes were also made to the city’s definition of a real estate company. Today, this is defined as any company in the real estate business that owns primarily real estate. As of July 1, 2017, this definition will expand to include real estate that is leased over a long period (more than 30 years) to determine if a company is, in fact, a real estate company.

Property with Readily Ascertainable Value

In some cases, when real estate is sold or exchanged in Philadelphia, that consideration includes property with a readily ascertainable value. Right now, the tax base is the value associated with a property outside of any cash or debt assumption. As of July 1, 2017, this will no longer be the case. From that point forward, the tax base cannot be any less than the sum of cash, assumed debt, and the value of the property with a readily ascertainable value.

The upcoming changes to realty transfer taxes are designed to limit the ability to avoid such taxes, but also make them fairer overall for those involved in the real estate business. It is hoped that these changes will generate more revenue for the city, which could be put to good use in several areas of development.