Realty Transfer Taxes: Understand the Costs and Plan Ahead
Transfer taxes are increasingly a major consideration when closing a real estate deal. As government budgets have become tighter over the years, the need for revenue has led to new transfer fees and legislation closing long-standing ‘loopholes” that allowed parties to legally avoid transfer taxes. The amount and type of tax owed varies widely based on the location of the property, its value, and the structure of the deal.
Transfer Taxes in Pennsylvania and New Jersey
In Pennsylvania, the state Realty Transfer Tax is 1% of the sale consideration. Local realty transfer taxes bring the overall rate to anywhere from 2% (most counties) to 5% (transfers within the City of Reading). There are exemptions from the transfer tax; examples include certain intra-familial transactions, transactions involving religious organizations, and property passed under wills or intestate succession. Properties within Keystone Opportunity Zones are not exempt from the realty transfer tax.
In New Jersey, the tax is called a Realty Transfer Fee and rates are uniform statewide. There is one schedule of rates for properties less than $350,000 in value, and a different set of rates for properties greater than $350,000 in value. For properties under $350,000 in value, there may be partial exemptions for seniors, the blind or disabled, or low and moderate income housing.
New Jersey also imposes an additional 1% fee on any property transfer in excess of $1 million. Commonly called the “Mansion Tax,” this fee originally applied only to residential properties; it was expanded in 2006 to apply to the transfer of most commercial properties.
The ability to structure transactions to avoid paying transfer tax has been significantly curtailed over the last decade. Parties often avoided transfer taxes by transferring a controlling interest in an entity owning real estate rather than the real estate itself. One example of this was the “89/11” rule; if less than 90 percent of a property-owning partnership was sold, the remaining 11 percent could be transferred three years later to avoid paying the tax.
In Pennsylvania, a series of legislative measures enacted in 2012 and 2013 largely closed the “89/11” loophole and imposed closer scrutiny on transactions that transferred an interest in entities owning real estate, particularly if more than one level of entity was involved. New Jersey instituted a Controlling Interest Tax (CIT) in 2008, which imposed a 1% tax on transfers of controlling interests in entities that directly or indirectly own real property. The CIT applies to most types of commercial property.
There may be ways to structure a transaction to avoid transfer taxes – such as long-term leases – but the deal usually needs to be sufficiently large enough to justify the cost and complexity. If you are facing a commercial real estate transaction where transfer taxes may be a consideration, WCRE and its team of experts can help guide you through the process.
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