The Party’s Over: Changes to the Philadelphia Realty Transfer Tax Obligations
An ordinance amending the Philadelphia realty transfer tax (RTT) chapter of the Philadelphia Code was enacted on December 8, 2016, and will come into effect on July 1, 2017. The ordinance makes two primary changes to the city RTT. (The 1% state RTT is not affected.)
(1) Goodbye 89/11, hello 74/26. Under current law, a “real estate company” owning Philadelphia real estate becomes subject to city RTT if one or more changes in the company’s ownership have the effect of transferring 90% or more of the total ownership interest in the company within a 3-year period.
Effective July 1, 2017, a “real estate company” owning Philadelphia real estate will become subject to city RTT if one or more or changes in the company’s ownership have the effect of transferring 75% or more of the total ownership interest in the company within a 6-year period.
The practical import of this change is somewhat limited, since 89/11 transactions have become fairly rare in recent years.
(2) Goodbye computed value, hello purchase price. Under current law, if a real estate company owning Philadelphia real estate becomes an “acquired real estate company” as a result of changes in the company’s ownership, the company’s city RTT liability is calculated based on the “computed value” of its Philadelphia real estate-i.e., the product of its assessed value for real-estate-tax purposes times the Philadelphia common level ratio factor (which is currently 1.02).
Effective July 1, 2017, the city RTT liability of an “acquired real estate company” will be calculated based on the “monetary value” of the company’s Philadelphia real estate, which is presumed to be the actual consideration paid for the company. This presumption may be rebutted by “alternative proof of the actual value of” the real estate (e.g., in the case of a real estate company which owns significant assets in addition to its real estate).
This is a big change. Because assessed values for real-estate-tax purposes have often lagged behind fair market values in recent years, it has often been possible to reduce city RTT liability by purchasing the ownership interests in the company owning real estate, rather than the fee interest in the real estate itself.
This summary is published for informational purposes only. It does not dispense legal advice or create an attorney-client relationship with those who read it. Readers should obtain professional legal advice before taking any legal action.
Real Estate Practice Group
- David A. Nasatir, Chair
- Paul N. Allen, Co-chair
- Anastasius Efstratiades, Co-chair
- Peter J. Oberkircher
- Warren W. Ayres
- Karen M. Sanchez
- Michael V. Phillips
- Michael P. Weinstein