Philadelphia changes real estate transfer tax law to close perceived ‘loophole’ in sale of interests in real estate companies | Ballard Spahr LLP

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Mayor Kenney on May 15 signed into law invoice amending Philadelphia’s real estate transfer tax as it applies to sales of interests in real estate companies.

Prior to July 1, 2017, if a real estate company that owned real estate in Philadelphia experienced a change in ownership of 90% or more over a three-year period, the company owed Philadelphia and Pennsylvania real estate transfer tax on the value calculated from his real estate in Philadelphia. . The calculated value of Philadelphia real estate is its assessed value for property tax purposes multiplied by the Common Level Ratio Factor (CLRF) for Philadelphia. Since AVI, Philadelphia’s CLRF has been close to 1.00; and currently it is 1.01.

Effective July 1, 2017, Philadelphia law changed. Instead of imposing the Philadelphia real estate transfer tax when a real estate company has undergone a change in ownership of 90% or more over a three-year period, the transfer tax is imposed when a real estate company undergoes a change in ownership of 75% or more over a period of six years. period of the year. At the same time, Philadelphia’s real estate transfer tax base, in the case of a bona fide sale of interests in a real estate company, also changed. Instead of computed value, Philadelphia’s real estate transfer tax base was presumed to be “actual consideration” paid for interests in the real estate company, that is to say, the value of the firm’s equity. (No comparable changes have been made to Pennsylvania’s real estate transfer tax.)

The city seems to believe that the estimated values ​​of Philadelphia real estate are so unreliable that, in the new law, the Philadelphia City Council calls the calculated value a “loophole.” The Board also apparently believes that the term “real consideration for interests in the partnership” should mean something other than equity value. To address these two perceived abuses, effective May 15, 2019, the new law states that the term “real consideration” includes any lien or encumbrance on real property existing before the transfer and not removed by it.

This change is clearly an effort by the city to ensure that a real estate company’s mortgage debt is included in Philadelphia’s transfer tax base in the event of an arm’s length sale of good faith of the interests of the company. Since the bill leaves in place language that creates the presumption that, in the case of a bona fide and arm’s length taxable sale of interests in a real estate company, the tax base on the transfer is the actual consideration paid for the company, it is unclear whether liens on real estate should be included in the determination of the tax base. The future will tell if the City has achieved its objective.

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