Flipping Properties: Pennsylvania Realty Transfer Tax Implications of Assigning Agreements of Sale

Our team of Pennsylvania real estate attorneys get asked about real estate transactions all the time. And one question that pops up frequently, especially with the rise of fix-and-flippers and wholesalers, is this: "Is the assignment of a real estate agreement of sale a taxable event in Pennsylvania?"

The short answer? It depends. And "depends" in the legal world usually means "it's complicated."  Let's break down the Pennsylvania Realty Transfer Tax (RTT) and how it applies to assignment scenarios.

What is the Pennsylvania Realty Transfer Tax (RTT)?

The RTT is a tax levied on the transfer of most sales of real estate in Pennsylvania. RTT ranges from 2%-5% of the total consideration of a property, with 1% submitted to the State, and the remainder going to the Municipality and School District for the property. The purpose of the tax is to generate revenue for the Commonwealth and its local governments. The tax is customarily split evenly between the seller and the buyer, but the parties may agree on other arrangements. Some transfers are exempt from the tax, such as conveyances between certain family members.  The full list of exempt transfers can be found here.

The General Rule: Transfer of Beneficial Ownership = Taxable Event

The key to understanding whether an assignment triggers RTT is to consider whether the assignment results in a transfer of beneficial ownership of the property. Pennsylvania law generally treats a transfer of equitable title, including beneficial ownership, as equivalent to a legal transfer for RTT purposes.

So, what does "beneficial ownership" mean? Think of it as having the rights and privileges associated with owning the property, even if you don't hold the deed just yet. This includes things like:

• The right to purchase the property under an agreement of sale

• The right to possession

• The right to profits from the property

• The right to direct future sale

How Does This Apply to Assignments? The Scenarios and the Taxman

Here's where it gets nuanced. Let's consider a few scenarios:

Scenario 1: Straight Assignment for Profit. 

Joe enters into an agreement of sale with Sally for $100,000. Before closing, Joe finds William (Assignee) who is willing to pay Joe $110,000 for the right to purchase the property. Joe assigns the agreement of sale to William (the Assignee) for $10,000 (Joe’s assignment fee). William then closes on the property.  This is the “classic” real estate flipper’s transaction

• Likely Taxable. This scenario is very likely to be subject to RTT.   The deed from Sally to William results in two transfer taxes: The first is on the $100,000 consideration for which Joe and Sally are liable, and another on the $125,000 consideration where Joe and William are liable.

Scenario 2: Assignment to a Closely Held Entity (e.g., LLC). Changing Ownership from Individual to Company.

Karen owns real estate. Rachel wants to purchase Karen’s real estate for use in a business venture. Rachel enters into agreement of sale with Karen to purchase the property for $300,000.00.  Rachel intends to take title in her own name. Rachel purchases the property with no mortgage. At settlement, through a PA title company Rachel pays Karen the $300,000.00 and Karen deeds the property over to Rachel.  After operating the business for a short time period an attorney advises Rachel to change the ownership of the property to her company Rachel, LLC.  in order to shield Rachel from any personal liability.  Rachel’s attorney files the deed with a Pennsylvania title company in order to record the documents.

• Likely Taxable. The result is transfer tax not only on the original purchase of $300,000.00 from Karen, which is split between buyer and seller.  But Rachel will also be faced with transfer tax on the transfer of ownership to her company, Rachel LLC.  The deed on the 2nd conveyance would be subject to transfer tax based on the Common Level Ratio multiplied by the Tax Assessment multiplied by the applicable transfer tax amount in that particular municipality.

Scenario 3: Assignment of Agreement to Newly Formed LLC.

Tom, a new real estate investor, enters into an agreement to purchase property in Pennsylvania. Prior to closing, Tom’s CPA advises him that he should take ownership of the property in a LLC.  Tom asks his attorney to form a special purpose entity (SPE) and assigns the agreement of sale to the SPE. At the closing, the seller conveys the property by deed to Tom’s SPE. 

• Potentially Taxable, but with Exemptions. This is not an unusual situation.  This is a grey area. While technically a transfer, Pennsylvania offers exemptions for certain transfers to closely held entities, provided specific conditions are met. RTT will not apply to the assignment of an agreement of sale to Tom’s SPE so long as the following requirements are met:

  • the initial agreement of sale expressly states that Tom was acting on behalf of a yet-to-be-formed SPE

  • the initial agreement of sale expressly states that Tom has “no intent to obtain legal or equitable title to the real estate”

  • the financing for the property must be in the name of the SPE

  • the SPE must purchase the property at closing either with funds obtained from financing or with its own assets

  • the assignment of the agreement of sale must result in a “repudiation” of Tom’s duties to the seller, and a “novation” on the part of the SPE to Tom’s duties.

Important Considerations & Takeaways:

• Legal Advice in Advance is Important.  As you can see, the application of the RTT to assignments can be complex. Before engaging in any assignment, especially if you're looking to profit, consult with one of Fiffik Law Group’s real estate attorneys. They can help you analyze your specific situation, advise you on how to structure the transaction to minimize RTT and protect your interests throughout the transaction.

  
  

• Documentation is Key: Regardless of the scenario, properly documenting the assignment transaction is crucial. This includes a clear assignment agreement, evidence of consideration (or lack thereof), and a clear explanation of the reasons for the assignment.

  
  

• Err on the Side of Caution: It's generally better to err on the side of caution and seek professional guidance. The penalties for non-compliance with the RTT can be significant.