Philadelphia Real Estate Transfer Tax

Philadelphia beginning July 1, 2017, will begin to tax transfers of interests in real estate entities based on the selling price of the entity, rather than the “computed value” (assessed value*1.02) of the realty. Recently, taxpayers have taken advantage to substantial discrepancies between assessed and market values to lower realty transfer tax. While some argued that the proper course was to focus on getting tax assessments right, the City nevertheless elected to change its law.

In addition, the realty transfer tax on changes in entity ownership previously had been triggered upon a 90% or greater change in ownership. The new law lowers the trigger to 75% effective July 1. Both these changes are in addition to the increase in the City’s tax rate to 3.1%.

The State rate remains at 1% and the state has not enacted changes to computed value or transfer triggers. So these rules continue to apply for the state portion of the tax both inside Philadelphia and to the balance of the Commonwealth of Pennsylvania where the State controls realty transfer tax enforcement.

Clients should note that the Philadelphia Office of Property Assessment is currently engaged in reassessing commercial property City wide for the year 2018. OPA expects to disseminate proposed new values in March of 2017 to give City Council sufficient time to consider appropriate rates.

The School District of Philadelphia hired a plaintiff’s firm located in Scranton to selectively challenge real estate tax assessments of certain commercial real estate for the 2017 year. This follows the same course that many school districts across the State have been following for the recent past. The constitutionality of such challenges under the Uniformity Clause of the Pennsylvania constitution is currently pending before the Pennsylvania Supreme Court. Even if the constitutionality of such non uniform appeals is upheld, the question will remain whether the School District of Philadelphia (where both the School District and the tax assessor are controlled by the same body, Philadelphia City Council) constitutionally can target selected properties. The commercial only city wide reassessments for 2018 also may be subject to constitutional challenge.

On a more general note, the incoming administration and the Republican members of Congress have promised to lower federal tax rates in 2017, and there is some talk of limiting itemized deductions in connection with tax reform. While the details of any new law will not be decided until next year, clients may want to take advantage of their ability to make donations to donor advised charitable funds for a 2016 deduction. These can be established very quickly with companies such as Vanguard or Fidelity. If you think the Medicare Net Investment Income Tax will disappear next year, you may want to postpone optional gains until 2017. Of course, predicting legislation is a difficult challenge.

If you want to discuss the realty transfer tax, contact Larry Arem at larem@klehr.com or if you want to discuss real estate assessments contact Carl Primavera at cprimavera@klehr.com or contact Larry.