Are you looking to transfer property in the Philadelphia area? You should be aware that typically, there are both state and local transfer taxes associated with this type of transaction, in addition to recording fees. Effective October 1, 2018, the transfer tax for the city of Philadelphia is 3.278%, with an additional state of Pennsylvania tax of 1%, for a total of 4.278%. This transfer tax is traditionally split between the buyer and the seller (with each party paying half) and becomes payable when the property deed or another document showing ownership is filed with the Record of Deeds Department. While this tax adds an extra expense to transferring property, there are a number of transfer tax exemptions available, which may allow you to avoid paying the tax. Philadelphia law currently recognizes twenty-eight exemptions in total. Below are a few of the more notable exemptions:
One of the most popular transfer tax exemptions is the intra-family exemption. Philadelphia Code § 19-1405(6) exempts transfers between:
§ Husband and wife
§ A divorced couple (pursuant to the divorce decree)
§ Parent and child (or the child’s spouse)
§ Brother or sister (or their spouse)
§ Grandparent and grandchild (or the grandchild’s spouse)
§ Any life partners (who are members of a Life Partnership that is verified pursuant to applicable law)
There are some differences between city (Philadelphia) exemptions and state (Pennsylvania) exemptions. For example, here you should be aware that state exemptions do not currently embrace a transfer between life partners, so you would still be subject to the applicable 1% state transfer tax. Also note that neither local nor state law permits exemptions on transfers between cousins or aunts/uncles to nieces/nephews. You would be required to pay transfer taxes in that scenario. You should also be aware that to claim the intra-family exemption, the city of Philadelphia requires documents verifying the relationship (i.e. birth certificate, marriage license, etc.).
Additionally, property passing through a will or intestate succession, transferred for no or nominal consideration is exempt from the tax per Section 7 of the applicable Philadelphia Code.
Finally, transfers between family members of an ownership interest in a real estate company are also exempt. Phila. Code § 19-1405(18).
RELIGIOUS ORGANIZATIONS, INTERESTS IN NONPROFIT HOUSING
If you are a religious organization or other nonprofit corporation, chances are you may be eligible for a transfer tax exemption. Section 15 of the applicable code provides that transfers between religious organizations or other persons/entities holding title for religious organizations are exempt from the transfer tax. This is provided that the property has not been used by the transferor for commercial purposes. Section 21 excludes transfers of interest in stock, a proprietary lease, or an occupancy agreement in a cooperative housing corporation or other organization established for the purpose of transferring interests in property on a not for profit basis.
Additionally, a transfer to or from a nonprofit housing corporation that has been incorporated by officials of Philadelphia for the purpose of promoting the development of low cost housing in the city is exempt from the tax. To take advantage of this exemption, the transfer cannot be to a for-profit grantee or to a person who does not qualify as a low to moderate income person. Finally, Philadelphia also exempts a transfer to a nonprofit housing organization where the nonprofit intends to renovate the property and transfer it within three years to an eligible transferee.
There is a common misconception that transfers are tax exempt if you are the owner of an LLC and you transfer the property from yourself to your own LLC or vice-versa. This is not the case, and interested parties must identify a specific provision in the Philadelphia Code if they are looking to claim they are exempt. However, there may be some exceptions to this rule.
In addition to paying the transfer tax, there are city and state recording fees attached to most real estate documents. For example, the recording fee for a deed will come to a total of $256.75. Visit the Department of Records’ website to view the recording fees for other documents.
The Philadelphia transfer tax can add a substantial cost to many real estate transactions. It is important to know when you may be eligible for one of the many transfer tax exemptions. Our offices can work with you to determine if your real estate transaction may qualify, and can help you take the necessary steps to create and record your deed and claim the exemption. Contact our office to learn more at 215-717-2200.
The material contained in this informational article should not be taken as personal tax advice, and cannot be used for the purposes of avoiding penalties under the Internal Revenue Code. Contact our offices for personal advice concerning your specific set of facts.