The Commonwealth of Pennsylvania imposes a 1% transfer tax on transfers of real estate. In most counties other than Philadelphia, the local governments generally charge a matching 1% transfer tax. The City of Philadelphia charges a 3% transfer tax in addition to the 1% payable to the Commonwealth.
If members of a “real estate company” (partnerships and certain other entities that own real estate) transfer 90% of their ownership interests in a three-year period, this triggers a transfer tax as if the entity had transferred the real estate itself. In order to avoid the transfer tax, especially in larger commercial transactions, real estate companies have structured transfers of ownership interests so that only 89% of the interests were transferred initially, and then the remaining 11% was transferred immediately following the end of three years (these are sometimes referred to as “89/11” transactions).
The City of Philadelphia previously amended its transfer tax regulations to close this loophole. Now the Commonwealth has followed suit. Under a recently adopted law, a realty transfer tax will be triggered when a legally binding commitment is entered into to transfer 90% or more of a real estate entity within a three-year period, or when the terms of the transfer are set and not subject to negotiation, and when the seller of the real estate gets fully paid within the three-year period. The new law will make it more difficult to avoid payment of the transfer tax in the situation where the seller wishes to effectively transfer 100% of all partnership interests in a real estate company to the owner.
The new law will become effective with respect to transfers occurring after January 1, 2013.
— Stu Cohen