The Pennsylvania Department of Revenue published on January 3, 2008, further guidance in the form of Q&As to respond to requests for clarification of its December 15, 2007, revisions to the realty transfer tax (RTT) regulations. We discussed the final RTT Regulations in a prior alert in December 2007.
Assignments to Related Parties.
In the Q&As, the Department of Revenue takes a surprising position that the pre-closing assignment of a realty purchase agreement to an affiliate, without consideration, may result in a second realty transfer tax. For example, if an individual or corporation enters into a purchase agreement with a seller and then assigns the right to purchase to a newly-formed single purpose entity, RTT will be imposed twice – once on the assignment (to be shared by the single-purpose assignee and the assignor and based on the “computed value” of the property) and then again on the actual purchase (to be shared by the buyer and the seller and to be based on the actual purchase price). The computed value of the property is calculated as the assessed value of the property divided by the common level ratio (the county-wide average ratio of fair market value of property to assessed value).
To avoid this double taxation on the purchase of real property, therefore, it is advisable that any such single purpose entity be formed at the outset and included as a party to the purchase agreement. Alternatively, a written side agreement between the purchaser and the single-purpose entity could clearly provide that the purchaser is acting in an agency capacity for the single-purpose entity, provided that the entity is in existence, and the side agreement is entered into, at the time the purchase agreement is executed.
Flips of Purchase Contracts.
The Q&As also change the treatment of arms-length sales of realty purchase agreements. According to the Q&As, a flip of a purchase agreement will result in a double transfer tax even if there is only one transfer of title. The seller and the original purchaser under the purchase agreement will be liable for RTT computed by reference to the purchase price in the purchase agreement, and the original purchaser and its assignee will be liable for a second tax computed by reference to the sum of that price plus the price paid for the assignment.
In addition, the Q&As confirm the transfer tax treatment of a taxpayer’s use of a qualified intermediary (QI) in a like-kind exchange under Internal Revenue Code section 1031. A double transfer tax will be imposed only if the QI takes title to the property. This should not present a problem for a typical like-kind exchange because a QI generally does not acquire title to any properties but only accepts assignments of contract rights. However, the adverse treatment of reverse exchanges (where an “exchange accommodation titleholder” typically does acquire legal title to the intended replacement property), as described in our prior alert, remains.