One of the costs associated with the purchase of a home in Pennsylvania is the imposition of the realty transfer tax. In most cities, townships and boroughs within the Commonwealth, the realty transfer tax is imposed at the rate of 2% of the actual consideration paid (or to be paid) for the transfer of an interest in real estate. (The local municipality’s rate is 1% and the Commonwealth of Pennsylvania’s rate is 1%; the City of Philadelphia’s realty transfer tax rate, on the other hand, is 3%, making a combined rate of 4%.) When either no consideration or minimal consideration is set forth in the deed, the tax is 2% (4% in Philadelphia) of the property’s actual monetary worth, which is computed via the use of the real estate’s assessed value and adjusted to the market value. In a typical transaction, the buyer and seller will split the transfer tax.
The purchase of real property on which a new building or home will be constructed presents a trap for the unwary with respect to the imposition of realty transfer tax. The value of a contract for the construction of the new building or home will be subject to the realty transfer tax when both of the following conditions apply: (1) an executory construction contract for a new building or home is effective prior to or simultaneously with the transfer of the title to the real property; and (2) the owner of the property under contract and the builder are affiliated.
An executory contract is a contract where at least one party has not completed its obligations thereunder. With respect to a construction contract, a contract is executory if a buyer is legally obligated to build a building or house with a specific builder when the buyer takes title to the real property. Further, no improvement can be made on the real property at the time of the sale.
For purposes of realty transfer tax, the owner of the real property and the builder will be deemed to be affiliated if they are connected by common ownership or by agreement. In a published circular, the Pennsylvania Department of Revenue has listed the following non-exclusive examples of where common ownership between the owner and the builder may cause an affiliation to exist: (i) the owner or his or her close relative is a shareholder, partner, member or other principal in the builder; (ii) the builder or his or her close relative is a shareholder, partner, member or other principal in the owner; or (iii) the owner and the builder are owned (either in whole or in part) by the same individual(s) or entity/entities.
The Department of Revenue has set forth the following non-exclusive examples of where an agreement between the seller and builder may result in an affiliation for realty transfer tax purposes: (a) an existing contract for construction of a home between the owner and the builder that is assigned to the buyer; (b) options to purchase one or more lots given by the owner to the builder; (c) rights of first refusal to buy one or more lots given by the owner to the builder; (d) sales agreement for one or more lots given by the owner to the builder; (e) contract appointing the builder as the only individual or company that can build improvements on the owner’s lots; (f) agency agreement whereby the builder acts as an agent for the owner who is selling property to the buyer; (g) agency agreement whereby the builder acts as agent for the owner in the sale of the property to buyer; and (h) a partnership or joint venture between the owner and builder to develop the lots.