On November 21, 2007, the Pennsylvania Office of Attorney General approved the Department of Revenue's proposed amendments to Pennsylvania's Realty Transfer Tax Regulations. The amendments will be implemented upon their publication in the Pennsylvania Bulletin, which could occur as early as mid-December 2007. While the Department of Revenue characterizes the proposed amendments as implementing its longstanding policy, they will in fact impose transfer tax on a number of transactions that are not currently taxable. Here is a summary of key effects of the amendments:
- Previously, no transfer tax was imposed on the conversion of certain entities from one form to another (for example, from a limited partnership to a limited liability company), where there was no change in the underlying economic ownership of the entity. The amended regulations provide additional requirements for a conversion to be exempt.
- A §1031 like-kind exchange may be subject to up to four transfer taxes (two sales, two purchases), because transfers to and from a "qualified intermediary" will be subject to transfer tax. Previously, a §1031 exchange was taxed as two transactions (one sale, one purchase), ignoring the role of the qualified intermediary.
- The assignment of a contract to purchase real estate for consideration will now incur transfer tax.
- A sale-leaseback that does not qualify as a narrowly defined "financing transaction," will be subject to transfer tax if the lease term exceeds 30 years (including most options to renew). The sale will remain subject to transfer tax.
- The amended regulations impose additional requirements for the transfer of real estate to an estate planning trust to be exempt from transfer tax. For example, the trust must remain revocable at all times during the settlor's lifetime, which does not permit the trust to become irrevocable upon the settlor's incapacity – a normal feature of such trusts.
- The termination of a lease will incur transfer tax if, at the time of termination, the remaining term of the lease exceeds 30 years and more than nominal consideration is paid for the termination.
- The amendments grant the Department of Revenue broad anti-abuse power to recharacterize a transaction by either combining multiple transactions or splitting a single transaction into parts to impose additional levels of transfer tax.
- The Department of Revenue rejected the business community's request to include in the amendments an exemption from transfer tax for the transfer of real estate to a single purpose entity specifically to obtain financing, which is a common requirement of mortgage lenders. Consequently, such transfers remain subject to transfer tax.
- The amendments specifically provide that the statutory exclusions from transfer tax for a transfer of real estate are unavailable in the context of transfers of interests in a real estate company. Thus, the transfer of an interest in a real estate company may be subject to transfer tax even though a direct transfer of the real estate owned by such real estate company would be exempt.
A more detailed explanation is available in our white paper "Pennsylvania Realty Transfer Tax Amendments."
Please call any of our Real Estate attorneys if you would like to discuss the these changes and how they may affect your transaction planning.