Multistate Tax Report

Tax Management
Multistate Tax Report
®
Reproduced with permission from Tax Management Multistate Tax, 21 WSTR 40, 10/03/2014. Copyright 姝 2014 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com
Ta x B a s e
Many states and local jurisdictions impose a tax on the transfer of a ‘‘controlling interest’’
in an entity that directly or indirectly holds real property. In this article, Sean Kanousis,
Sam Melehani and Reed Schreiter discuss the unique controlling interest transfer tax rules
for commercial real property in two states — New York and Pennsylvania — and in two cities — New York City and Philadelphia.
Losing Control: How Varying Real Estate Transfer Tax Treatment
Of Entity Interest Transfers Creates Confusion For Taxpayers
BY SEAN KANOUSIS, SAM MELEHANI
AND REED SCHREITER
Sean Kanousis (sean.richman.kanousis@
us.pwc.com) is a New York-based principal in
the State and Local Tax (SALT) practice of
PwC, focused on the Real Estate Industry, as
is Sam Melehani (sam.melehani@
us.pwc.com), a Los Angeles-based SALT partner and Reed Schreiter (reed.schreiter@
us.pwc.com) is a Sacramento-based SALT
director. The authors would like to thank for
their contributions to this article PwC’s Dana
Matsuno, a director in Los Angeles, and
Michael Vadner, a director in Philadelphia.
Introduction
any state and local jurisdictions impose a real
property transfer tax on the transfer of an interest in real property. A number of jurisdictions,
including New York and California, enacted their transfer tax on the heels of the repeal of the federal documentary stamp act, effective Jan. 1, 1968, utilizing the
language of the federal act for their new state taxes.
Other jurisdictions, such as Pennsylvania, enacted and
administered their own documentary stamp acts in addition to and independent of the federal act before its
repeal.
M
A recent trend among states and local jurisdictions is
to impose tax on the transfer of a ‘‘controlling interest’’
in an entity that directly or indirectly holds real property. Generally, a controlling interest is deemed trans-
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ferred when a specified percentage of the total combined voting stock or beneficial interests of an entity is
conveyed.
This article discusses the controlling interest transfer
tax rules for commercial real property in two significant
states — New York and Pennsylvania — and in two cities — New York City and Philadelphia. These jurisdictions have unique rules for determining when a ‘‘controlling interest’’ is transferred.
New York State
Initially, the New York Real Estate Transfer Tax
Law, effective Aug. 1, 1968, was substantially similar to
the repealed federal act. However, in 1989, New York
extended its transfer tax to include transfers of economic interests in real property.1
New York’s real estate transfer tax is imposed on
conveyances of real property at a rate of $2 per $500 of
consideration when the consideration exceeds $500.2
All conveyances of real property are presumed taxable.3 The grantor of the interest in real property is primarily liable for the tax.4 If, however, the grantor fails
to pay or is exempt from the tax, the tax is levied on the
grantee, effectively making both parties responsible for
the tax.5 This situation arises, for example, in transactions where the grantor is a tax exempt entity and the
grantee is a taxable entity.6 The grantor will not be assessed the tax, but the tax will still be imposed on the
buyer since it has no such exemption and is second in
line to pay any transfer taxes due.7
‘‘Interest in real property’’ is defined to include ‘‘title
in fee, a leasehold interest, a beneficial interest, an encumbrance, development rights, air space and air
rights, or any other interest with the right to use or occupancy of real property or the right to receive rents,
profits or other income derived from real property [,
and] . . . an option or contract to purchase real property.’’8 The definition does not include a right of first refusal to purchase real property.9
Controlling Interest Equals
50 Percent or More
New York also imposes the real estate transfer tax
on ‘‘the transfer or acquisition of a controlling interest
in any entity with an interest in real property.’’10 The
transfer or acquisition of a controlling interest in an en1
See generally N.Y. Tax Law §1401(b), (d)(iii); N.Y. Comp.
Codes R. & Regs. tit. 20, §§575.1(b), (d)(4) & (e)(1).
2
N.Y. Tax Law §1402(a).
3
Id. §1404(b).
4
Id. §1401(g); N.Y. Comp. Codes R. & Regs. tit. 20,
§575.4(a).
5
N.Y. Tax Law §1404(a); N.Y. Comp. Codes R. & Regs. tit.
20, §575.4(a). The tax becomes a joint and several liability of
both parties. (N.Y. Tax Law §1404(a); N.Y. Comp. Codes R. &
Regs. tit. 20, §575.4(a).)
6
N.Y. Tax Law §1404(a); N.Y. Comp. Codes R. & Regs. tit.
20, §575.4(c)(1).
7
N.Y. Tax Law §1404(a); N.Y. Comp. Codes R. & Regs. tit.
20, §575.4(a). See Exemptions and Exclusions below for further discussion.
8
N.Y. Tax Law §§1401(f) & 1405(b).
9
Id. §1401(f).
10
Id. §1401(e); N.Y. Comp. Codes R. & Regs. tit. 20,
§575.6(a).
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tity occurs ‘‘when a person, or group of persons acting
in concert, transfers or acquires,’’ in the case of a corporation, either 50 percent or more of the total voting
stock of all classes of stock of the corporation or 50 percent or more of the capital, profits, or beneficial interest
in the voting stock of the corporation, or in the case of
a partnership, association, trust, or other entity, 50 percent or more of the capital, profits, or beneficial interest
in the partnership, association, trust, or other entity.11
It is important to note that the New York rules define
‘‘controlling interest’’ to be ‘‘fifty percent or more,’’
meaning that a transfer or acquisition of an interest of
exactly 50 percent will trigger the tax.
Aggregating Transactions of
Persons Acting in Concert
For purposes of the 50 percent test, a ‘‘group of persons [are] acting in concert’’ when ‘‘one person influences or controls the actions of another.’’12 Such influence or control may occur due to common ownership or
control (e.g., a parent and a wholly-owned subsidiary)
or when certain factors indicate that the persons are
acting as a ‘‘single entity,’’ including: (1) the transfers
or acquisitions are closely related in time, (2) there are
few grantors or grantees, (3) the contracts of sale contain mutual terms and (4) the grantors or grantees have
entered into an agreement in addition to the sales contract binding themselves to a course of action with respect to the transfer or acquisition.13 Such rules are
highly dependent on the facts and circumstances of the
transaction, and it is generally up to the tax commissioner to establish and connect the facts related to a
transaction. To that end, taxpayers should take care to
understand what information is provided for public
view so as not to provide inaccurate information about
the transaction. For example, a sale of a 30 percent interest in real estate or of entities that own real estate is
generally not subject to the New York State transfer
tax. However, in this example if the buyer issues a press
release to its investors indicating that the acquisition of
the real estate is part of a broader interest in potentially
purchasing an additional interest over the next couple
of years, the tax commissioner may connect the initial
purchase with later purchases and apply the transfer
tax. While the view of the acquirer is that the initial acquisition is potentially part of an overall step plan, no
subsequent transactions have been agreed to or entered
into. However, a reader unfamiliar with the details
might be left with the impression that the transaction
was structured to occur in phases specifically to avoid
transfer taxes.
Combining Transfers Occurring
Within a Three-Year Period
New York taxpayers are cautioned to consider that
analyzing a single transaction may not be sufficient to
11
N.Y. Comp. Codes R. & Regs. tit. 20, §575.6(a). For a corporation, ‘‘controlling interest’’ is ‘‘either fifty percent or more
of the total combined voting power of all classes of stock, or
fifty percent or more of the capital, profits or beneficial interest in such voting stock of such corporation.’’ (Id.) For a partnership, trust, or other entity, ‘‘controlling interest’’ is ‘‘fifty
percent or more of the capital, profits or beneficial interest in
such partnership, association, trust or other entity.’’ (Id.)
12
N.Y. Comp. Codes R. & Regs. tit. 20, §575.6(b)(1).
13
Id. §575.6(b)(2).
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determine real property taxation exposure. Taxable
transfers of entity interests may occur over time. For
both corporations and partnerships, transfers or acquisitions of interests in the same corporation, partnership
or other entity occurring within three years are combined to determine if a transfer or acquisition of a controlling interest has occurred.14 For example, selling a
30 percent interest to one party in year one will not be
deemed to be a change in control and no transfer tax
will be due. However, a sale in year two of another 30
percent interest could trigger the transfer tax since cumulatively 60 percent was transferred during the twoyear period, exceeding the 50 percent threshold.
Although the time period for aggregation is generally
three years, transfers or acquisitions of interests will
also be added together if they were intentionally timed
to occur more than three years apart as part of a plan to
avoid the real estate transfer tax.15 These anti-abuse
provisions of this law require careful analysis and consideration in any transaction to determine the impact if
these provisions apply to the transaction. These rules
shift the presumption of taxation to the parties to the
transfer rather than to the tax commissioner if the
transactions causing a change in control occur within
the three-year period. Note, however, that normal public changes in ownership from purchase and sale of the
corporate entity on the stock exchange are not considered part of the same transactions occurring at the real
estate level.
Real Estate Investment Trusts
The transfer tax is imposed on certain real estate investment trust (REIT) transfers at a reduced rate of $1
for each $500 of consideration.16 A REIT transfer includes any conveyance of real property to a REIT or to
a partnership or corporation in which a REIT owns a
controlling interest immediately following the conveyance, when the conveyance occurs on or after July 13,
1996, and before Sept. 1, 2014, or occurs in connection
with the initial formation of the REIT and specified conditions are met.17 Given the materiality of these taxes,
several companies have taken advantage of these provisions, especially in the formation of a new REIT,
whereby in some cases the tax is reduced with the formation of baby-REITs18 in connection with the acquisition of real estate in New York.
Leasehold Interests and Options
A leasehold interest may qualify as an interest in real
property and therefore the creation of a lease or sublease qualifies as a conveyance subject to the transfer
tax when: (1) the leasehold, including options for renewal, runs for more than 49 years; (2) substantial capital improvements are or may be made for the lessee or
sublessee; and (3) the lease is for substantially all of the
premises constituting the real property.19 An option to
14
N.Y. Comp. Codes R. & Regs. tit. 20, §575.6(d).
Id.
16
N.Y. Tax Law §1402(b)(1).
17
Id. §1402(b)(2).
18
A baby-REIT may be used when a single parent REIT
owns multiple properties and forms a subsidiary (or babyREIT) for each asset.
19
Id. §§1401(e) & 1402(a); N.Y. Comp. Codes R. & Regs. tit.
20, §575.7(a). ‘‘Substantially all’’ means 90 percent or more of
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purchase real property constitutes an interest in real
property.20 An option to purchase real property combined with the right to use and occupy the real property
is a conveyance subject to the transfer tax.21 In the case
of a creation of a leasehold interest or the granting of
an option with the use and occupancy of real property,
consideration includes, but is not limited to: (1) the
present value of the rental and other payments attributable to the use and occupancy of the real property; (2)
the amount paid for an option to purchase or renew;
and (3) the present value of rental or other payments attributable to the exercise of any option to renew.22
Exemptions and Exclusions
New York provides both exemptions and exclusions
from the real estate transfer tax. Exempted from the
real estate transfer tax are transfers or acquisitions by
New York State and its agencies, instrumentalities, political subdivisions and public corporations; the United
Nations; the U.S. government and its agencies or instrumentalities; and nonprofit property/casualty insurance
companies.23 While the New York Tax Law provides
that the real estate transfer tax is paid by the grantor, if
the grantor is exempt from the payment of the tax, then
the grantee is liable for the tax.24 Thus, in any transaction where one of the above entities is the grantor, then
the grantee will be liable for the transfer tax.25 The
grantor will remain liable for the tax if one of the above
entities is the grantee in a conveyance.
In addition to the listed exemptions, certain transactions are not subject to, or are excluded from, the real
estate transfer tax, including conveyances that are or
were used to secure a debt or other obligation; conveyances that confirm, correct, modify or supplement a
prior conveyance, if no additional consideration is
given; conveyances that occur without consideration;
that are made pursuant to the federal bankruptcy act;
and conveyances that consist of the granting of an option to purchase real property without the right to use
or occupy the property is not subject to tax.26
The most significant exclusion is for conveyances
that ‘‘effectuate a mere change in identity or form of
ownership or organization where there is no change in
beneficial ownership.’’27 By regulation, the state prothe total rentable space of the premises, exclusive of common
areas. (N.Y. Comp. Codes R. & Regs. tit. 20, §575.7(a)(3).) The
transfer of a leasehold interest, regardless of the term, by assignment or surrender, is a conveyance subject to tax. (Id.
§575.7(d)(1).)
20
N.Y. Tax Law §1401(e).
21
N.Y. Comp. Codes R. & Regs. tit. 20, §575.7(a).
22
N.Y. Tax Law §1401(d); N.Y. Comp. Codes R. & Regs. tit.
20, §575.1(d)(2).
23
Id. §1405(a).
24
Id. §1404(a). See discussion under ‘‘New York’’ above for
discussion of liability for the tax.
25
Id. §1405(a)(2).
26
Id. §1405(b); N.Y. Comp. Codes R. & Regs. tit. 20,
§575.9(c).
27
N.Y. Comp. Codes R. & Regs. tit. 20, §575.9(c)(6). The
federal documentary stamp act, in former Internal Revenue
Code §4382(b)(1)(D), contained an exclusion couched in similar language that read: ‘‘a mere change in identity, form, or
place of organization.’’ When interpreting this phrase, the federal court of appeal concluded that Congress did not intend to
limit the exclusion to corporate reorganizations described in
Internal Revenue Code §368(a)(1)(F). The court of appeal
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vides a non-exhaustive list of example transactions that
result in no change in beneficial ownership, including:
s the conveyance by tenants-in-common of their interest in real property to a partnership or a corporation,
the partnership or corporation interests being in the
same pro rata shares as the tenants-in-common held
prior to conveyance.
s the conveyance by a corporation to its shareholders who will hold the real property as tenants-incommon in the same pro rata share as their ownership
in the corporation.
s the conveyance by a corporation to its whollyowned subsidiary, from a wholly-owned subsidiary to
its parent, or from one wholly-owned subsidiary to another.
s the conveyance by a person to a partnership in
exchange for an interest in the partnership, to the extent of the grantor’s interest in the partnership.28
Despite the statutory framework which seems to
clearly distinguish between parties that are exempt
from the transfer tax and conveyances that are excluded from the tax, the courts and the New York Department of Taxation and Finance have been inconsistent in their interpretation of the ‘‘mere change in beneficial ownership’’ provision; in some cases, treating it
as an exemption strictly construed against the taxpayer
and in other cases as an exclusion strictly construed
against the state.29 For example, a common transaction
includes the transfer of real estate between parent and
subsidiary. Such transfers generally involve a 100 percent change in ownership of the real estate, but a zero
percent change in control of the legal entity. The state
takes the position that any subsequent and fractional
changes in control of the subsidiary will be subject to
transfer tax if occurring within three years of the transfer of the real estate, excluding normal ownership
changes unrelated to the initial transaction, such as corporate stock sales/purchase on the open market. This
interpretation is often a surprise to taxpayers, particularly since the initial transaction was tax exempt.
New York City
Property owners in New York City are subject to a
second real property tax regime in addition to the state
real estate transfer tax (as discussed above) – the New
York City Real Property Transfer Tax. New York City
imposes its real property transfer tax on transfers of
real property or interests in real property when the consideration exceeds $25,000.30 In the case of nonresidential real property, the tax is applied at a graduated rate
of 1.425 percent of the consideration when the considstated: ‘‘in using the language ‘a mere change in identity, form,
or place of organization’ in §4382(b)(1)(D) Congress intended
to exempt a generic class of formalistic transactions involving
no change in ownership and no new dedication of capital. It
did not intend to import into the excise tax field a specific definition of whatever type of reorganization is covered by
§368(a)(1)(F).’’ (Columbia Gas of Pennsylvania, Inc. v. United
States (1971) 446 F.2d 320.)
28
N.Y. Comp. Codes R. & Regs. tit. 20, §575.10.
29
In the Matter of the Petition of Yonkers and Hempstead
Realty, LLC, NYS Tax Appeals Tribunal, DTA No. 819336
(12/09/2004); In the Matter of the Petition of Viacom, Inc., NYS
Tax Appeals Tribunal, DTA No. 819591 (05/03/2007); Consolidated Edison Co. of New York, Inc., New York TSB-A-97(9)R.
30
N.Y.C. Admin. Code §11-2101; R.C.N.Y. §23-01.
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eration is $500,000 or less and 2.625 percent of the consideration when the consideration is greater than
$500,000.31 As with the state real estate transfer tax, the
grantor is responsible for paying the tax.32 If the
grantor does not pay, the grantee must pay the tax.33
Consideration is the price paid for the real property or
economic interest in real property.34 No deductions are
allowed for the cancellation or discharge of indebtedness or obligation, mortgages, liens, or other encumbrances.35 Where a grantee agrees to pay the city and
state transfer taxes due on a conveyance, as part of the
consideration for the conveyance, the obligations so assumed are included in computing the tax.36
The transfers of controlling economic interests in
real property are specifically listed as taxable transactions.37 These transactions are defined as transfers of
50 percent or more of stock or interest in a corporation,
partnership, association, or other entity that owns or
leases real property.38 A taxpayer has an ‘‘economic interest in real property’’ if the taxpayer : (1) owns shares
of stock in a corporation that owns real property; (2)
owns an interest in a partnership, association, or other
unincorporated entity that owns real property; or (3)
owns a beneficial interest in a trust that owns real property.39 As with the state real estate transfer tax, a taxpayer holds a controlling interest if the taxpayer owns
50 percent or more of the stock in a corporation or 50
percent or more of the capital, profits, or other beneficial interest in a partnership, association, trust, or other
entity.40
Rebuttable Presumption of Related Transfers
The city provides that the transfer of a controlling interest is subject to tax when made in one ‘‘or several related transfers.’’41 The city will presume that transfers
made within a three-year period are related and such
transfers will be aggregated unless the parties can
prove that the transfers are unrelated.42 The city and
the state apply the same rules with respect to presumptions, safe harbor rules and disclosure of transactions in
public. Careful consideration should be given to the
wording of any public disclosure of an acquisition and
evaluated against the safe harbor rules to avoid providing or supporting an incorrect conclusion about the
facts or intent of the transaction.
Real Estate Investment Trusts
As with the state transfer tax, the city tax on qualified transfers or conveyances of REITs is imposed at 50
percent of the otherwise applicable rate for transfers
occurring on or after July 13, 1996, and before Sept. 1,
2014.43 A REIT transfer is: (1) a ‘‘deed or other instru31
N.Y.C. Admin. Code
N.Y.C. Admin. Code
33
N.Y.C. Admin. Code
34
N.Y.C. Admin. Code
35
Id.
36
R.C.N.Y. §23-02.
37
N.Y.C. Admin. Code
38
N.Y.C. Admin. Code
39
N.Y.C. Admin. Code
40
N.Y.C. Admin. Code
41
R.C.N.Y. §23-02.
42
Id.
43
N.Y.C. Admin. Code
32
§11-2102; R.C.N.Y. §23-03.
§11-2104; R.C.N.Y. §23-01.
§11-2104; R.C.N.Y. §23-01.
§11-2101(9).
§11-2101; R.C.N.Y. §23-03(a)(2)(i).
§11-2101(8); R.C.N.Y. §23-02.
§11-2101(6); R.C.N.Y. §23-02.
§11-2101(8); R.C.N.Y. §23-02.
§11-2102(e)(2)(B).
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ment or transaction conveying or transferring’’ real
property in New York City, or an economic interest in
the property, to a REIT, as defined in Internal Revenue
Code §856, or to a corporation or partnership controlled
by the REIT immediately following the transaction, or
(2) the issuance or transfer of interests in the REIT or
controlled by entity in connection with the transaction.44
tax at the rate of one percent of the value of the real
property transferred.47 Value is the actual consideration or price of the property represented in the writing.48 When the document does not state consideration
or the transaction is not arm’s-length, the tax rate is one
percent of the property’s actual monetary worth computed through use of assessed value adjusted to market
value.49 Any party to the transaction, or on whose behalf the transaction occurs, is liable for the tax.50
Exemptions
New York City exempts transfers which are ‘‘a mere
change of identity or form of ownership or organization
to the extent the beneficial ownership of such property. . .remains the same’’ from the real property transfer tax.45 Note, however, that a transfer among affiliates
is generally considered a 100 percent change in ownership and 0 percent change in control, which is not subject to the New York City transfer tax. If the control of
the affiliates shifts within the first three years of the initial exempt change, the city could assert that a fractional control change is subject to the city’s controlling
interest transfer tax.
Pennsylvania
Enacted as a temporary tax in 1951, the Pennsylvania Realty Transfer Tax became permanent in 1961.
The tax is a documentary stamp tax imposed on the
value of real property transferred by deed, instrument,
long-term lease, or other writing that evidences any
transfer of real property.46 Pennsylvania imposes the
44
N.Y.C. Admin. Code §11-2102(e)(2)(A). The following
additional requirements must also be met for a transfer to
qualify as a REIT transfer:
s transaction must be in connection with the initial formation of the REIT;
s grantor must have received as consideration for the
transfer ownership interests in the REIT or controlled entity
having a value of at least 40 percent of the excess of consideration received by the grantor over the amount of mortgage
liens and other encumbrances on the property or economic interest transferred. If less than 100 percent is transferred, a proportionate amount of mortgages and other encumbrances is
subtracted, excluding those placed on the property in anticipation of the formation of the REIT;
s the grantor must retain ownership in the REIT or controlled entity for at least two years;
s 75 percent or more of the cash proceeds of the initial offering of the REIT shares must be used for the following purposes:
s (1) to make payments on loans secured by real property or the economic interests in real property, owned directly or indirectly by the REIT;
s (2) to pay for capital improvements to real property
owned directly or indirectly by the REIT;
s (3) to pay brokerage fees and commissions, professional fees and payments to or on behalf of a tenant as inducement to enter into a lease or sublease of real property
owned directly or indirectly by the REIT;
s (4) for payments into reserves for any of the above
purposes; or
s (5) to acquire real property or an economic interest in
real property in a transaction other than a ‘‘REIT transfer.’’
N.Y.C. Admin. Code §11-2102(e). See also New York City
Information Bulletin No. 94-1, 06/28/1994.
45
R.C.N.Y. §23-05(b)(8). See New York State Exemptions
and Exclusions above and fn. 26 for further discussion.
46
Pa. Stat. Ann. tit. 72, §8102-C.
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Special Rules for Real Estate Companies
A ‘‘Declaration of Acquisition’’ is a document subject
to the Realty Transfer Tax and is required to be submitted for recording by a real estate company that becomes
an ‘‘acquired real estate company.’’51
Transfers of ‘‘real estate company’’ interests are subject to the tax when 90 percent or more of the total ownership interest in a real estate company is transferred
within a three-year period.52 A ‘‘real estate company’’ is
generally defined as an entity primarily engaged in the
business of holding, selling, or leasing real estate with
90 percent of its ownership interest held by 35 or fewer
persons and which either (1) derives 60 percent or more
of its annual gross receipts from the ownership or disposition of real estate; or (2) holds real estate, the value
of which comprises 90 percent or more of the value of
its entire tangible asset holdings, exclusive of tangible
assets which are freely transferable and actively traded
on an established market.53
However, effective Jan. 1, 2014, Pennsylvania expanded the definition of a ‘‘real estate company’’ to include a corporation or association of which 90 percent
of the fair market value of its assets consists of a direct
or indirect ownership interest in a real estate company.54 This change increases the number of taxpayers
that could potentially be subject to the realty transfer
tax. Prior to the law change, changes in ownership of
upper tier entities that held an interest in a real estate
company may not have triggered the tax. However, under the new law, changes in ownership of upper tier entities that own real estate companies may trigger the
tax.
Prior to Jan. 1, 2014, Pennsylvania provided that
more than 90 percent of a real estate company’s ownership interests were deemed transferred when: (1) the
transferring party provides a legally binding commitment, enforceable at a future date, to execute the transfer; (2) the terms of the transfer are fixed and not subject to negotiation; and (3) the transferring party receives full consideration, in any form, in exchange for
the transfer.’’55 Effective Jan. 1, 2014, Pennsylvania law
broadened this deemed transfer rule by removing re47
Id.; 61 Pa. Code §91.111(a).
Pa. Stat. Ann. tit. 72, §8101-C.
49
See Pa. Stat. Ann. tit. 72, §8102-C; 61 Pa. Code §91.131.
50
Pa. Stat. Ann. tit. 72, §8102-C; 61 Pa. Code §91.111(a). it
is the joint and several legal duty of the parties to the transaction to pay the proper tax due. (61 Pa. Code §91.111(b).)
51
61 Pa. Code §91.203.
52
Id. §91.202(a).
53
Id. §91.201(a).
54
H.B. 465, §§24 & 44(1), amending Pa. Stat. Ann. tit. 72,
§8101-C.
55
H.B. 761, §12, amending Pa. Stat. Ann. tit. 72, §8102C.5(a)(3).
48
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quirements (2) and (3) and modifying requirement (1)
to include a legally binding commitment ‘‘or option.’’56
Exemptions
Pennsylvania provides two main exemptions from
the realty transfer tax. The first involves transfers
where there is an absence of a change in beneficial
ownership. Specifically, the exemption applies to a corporation or association’s transfer of real property held
in the name of the corporation or association to a
grantee that owns an interest in the transferring entity
in the same proportion to its interest in the real property being conveyed and the grantee has owned the interest in the entity for more than two years.57
The second exemption involves transfers made pursuant to a statutory merger or consolidation, unless the
Department reasonably determines that the primary intent for such merger or consolidation is the avoidance
of the transfer tax.58 By regulation, the Department will
consider the following factors in determining whether a
merger or reorganization is undertaken to avoid tax: (1)
whether one or more of the parties in the reorganization is a real estate company, or (2) whether the merger
or consolidation directly or indirectly effectively transfers 90 percent or more of the total ownership rights in
the real estate company.59 Additional complexities arise
when the transfer occurs at higher tier entities of the organization where affiliates of subsidiaries’ ownership
shifts. Such analysis is important to evaluate both at the
time of the ownership changes and again when evaluating purchase and sales options of real estate. Finally,
conversions of entities’ legal form, e.g., from LLC to LP,
are not always tax exempt. Careful consideration of
such conversions is important to avoid the unintended
consequence of incurring transfer taxes at the state
level when no change in the ultimate ownership of the
real estate occurs.
Philadelphia
The Pennsylvania Realty Transfer Tax does not impair the taxing powers of local jurisdictions, which are
authorized to levy and collect local real estate transfer
taxes.60 Philadelphia is one such local jurisdiction imposing a real estate transfer tax. Philadelphia’s realty
transfer tax went into effect Jan. 1, 1953. The City Department of Revenue administers the tax, and the recorder affixes the stamp or writing evidencing payment
of the tax.61
Philadelphia’s Realty Transfer Tax
strument, or other writing.62 ‘‘Value’’ means the
amount of actual consideration paid for the property,
and includes ground rents.63 The tax is imposed on persons who transfer ownership of realty located in Philadelphia, or on persons who make, execute, deliver, accept, or present for recording any taxable document or
on whose behalf any document is made, executed, delivered, accepted or presented for recording, or on persons who accept ownership of realty in the city.64
A taxable ‘‘document’’ is any deed, instrument or
writing, including a certificate of transfer, by which any
lands, tenements, or hereditaments in Philadelphia or
any interest therein, are granted, bargained, sold, or
otherwise conveyed to the grantee, purchaser, or any
other person, which is present for recording with the
city.65 The Realty Transfer Tax is also imposed on the
transfer of interests in a legal entity owning real property.66
Real Estate Companies
Philadelphia imposes a tax on a ‘‘real estate company’’ when 90 percent or more of ‘‘the total ownership
interest in the company’’ is transferred within a threeyear period.67 Although the definition of ‘‘real estate
company’’ in Philadelphia bears some similarities to the
definition of the term for Pennsylvania purposes, there
are marked differences. A ‘‘real estate company’’ is generally defined in the Philadelphia Code as: (1) an entity
primarily engaged in the business of holding, selling, or
leasing real estate with 90 percent of its ownership interest held by 35 or fewer persons and that either (a) derives 60 percent or more of its annual gross receipts
from the ownership or disposition of real estate, or (b)
holds real estate, the value of which comprises 50 percent or more of the value of its entire tangible asset
holdings, exclusive of tangible assets which are freely
transferable and actively traded on an established market; or an entity that holds, directly or indirectly, as 90
percent or more of the value of its assets, an interest in
a real estate company.68
A real estate company is ‘‘acquired,’’ or experiences
a change in ownership, if the change in the ownership
interest does not affect the continuity of the company,
and, together with prior changes within the preceding
three years, has the effect of transferring, directly or indirectly, 90 percent or more of the total capital and profits ownership interest in the company.69 An ownership
interest may be changed by (1) a member’s or shareholder’s sale, exchange, gift, bequest or other transfer
of his ownership interest, (2) a member’s withdrawal or
the addition of a new member, or (3) an issuance or
cancellation of stock or ownership interest.70
Philadelphia imposes a 3 percent realty transfer tax
on the value of real property transferred by deed, in56
H.B. 465, §26, amending Pa. Stat. Ann. tit. 72, §8102C.5(a)(3).
57
Pa. Stat. Ann. tit. 72, §8102-C.3(13); 61 Pa. Code
§91.193(b)(13).
58
Pa. Stat. Ann. tit. 72, §8102-C.3(12); 61 Pa. Code
§91.193(b)(12)(iii).
59
61 Pa. Code §91.193(b)(12)(iii).
60
Pa. Stat. Ann. tit. 72, §§8101-D & 8114-D. While this article focuses on Philadelphia’s realty transfer tax, jurisdictions
throughout the state of Pennsylvania also impose realty transfer taxes at rates varying from one to four and a half percent.
61
Phila. Code §§19-1403 & 19-1414.
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Exemptions and Exclusions
Philadelphia’s transfer tax exempts from the tax
transfers by or to the U.S., the Commonwealth, or any
62
Id. §§19-1402(6) & 19-1403(1)(g).
Id. §19-1402(14).
64
Id. §19-1403(1).
65
Id. §19-1403(6).
66
Id. §19-1401.
67
Id. §19-1407(1).
68
Id. §19-1402(11).
69
Phila. Real Estate Transfer Tax Regs. §602(a).
70
Id. §602(b).
63
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of their institutions, agencies, or political subdivisions.71 If the exemption is applied to one of the parties,
another party to the transaction will be liable for the
tax.72
There are a number of transactions excluded from
the tax, including those precluded under the Constitution or statutes of the U.S., transfers between husband
and wife, and transfers for no or nominal consideration
between principal and agent, from trustee to successor
trustee, or trustee to beneficiary.73 There is no general
exclusion, however, for transfers where the beneficial
ownership remains the same.74 Further, Philadelphia
does not provide an exemption when a transfer by
merger, consolidation, or acquisition occurs. Accord71
Phila. Code §§19-1404.
Id. §19-1403(1).
73
Id. §19-1405.
74
Id. §19-1402(14)(b) does exclude from the current real
estate transfer tax base the value of real estate transferred pursuant to a plan of liquidation and dissolution but only to the
extent that the owners of the liquidating corporation or association paid transfer tax on the value of the real estate at the
time of its original transfer to the liquidating entity.
72
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ingly a mere change in identity of an entity that owns
real estate in Philadelphia is generally subject to the
real estate transfer tax.
Conclusion
The real estate transfer tax imposed by New York
State, New York City, Pennsylvania and Philadelphia
are complex and transfers could trigger unintended
taxes if not carefully analyzed and considered. Moreover, the application of these taxes at the state level
may be different than at the city level, potentially resulting in taxation of transactions at the city level that are
otherwise exempt at the state level. In conclusion, when
entering into real estate transactions, both the buyer
and seller should consider the impact of any public
statements regarding the transaction. Often, announcements of future plans provide the taxing jurisdiction
with evidence of the long term intent of the parties regarding a piece of real estate, making it more difficult
to defend against any attempts in the future by the taxing authority to bundle the transactions to impose the
transfer tax on a series of transactions that in reality are
not related.
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