Recent Pennsylvania Realty Transfer Tax Rulings

July 2008 In The Zone

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The Pennsylvania Department of Revenue (the Department) issued two recent rulings on the applicability of the realty transfer tax to the following transactions:

Corrective Deed from Partners to General Partnership

The Department concluded that a deed that conveys title to real estate from two taxpayers to a general partnership consisting of the two taxpayers would qualify as a non-taxable corrective deed for Pennsylvania realty transfer tax purposes. This exclusion for a deed made without consideration for the sole purpose of correcting an error in the description of the parties or of the premises conveyed only applies if:

  1. the property interest in the correctional deed is identical to the property intended to pass with the original deed
  2. the parties treated the property interest described in the correctional deed as that of the grantee from the time of the original transaction
  3. the parties have not treated the property interest described in the original deed as the property of the grantee from the time of the original transaction

The Department qualified its conclusion by stating that in order for the corrective deed exclusion to be applicable, there must be evidence to demonstrate an actual scrivener error rather than an error of judgment. If the evidence indicates that title to the real estate was purposefully conveyed to the owners of the business entity rather than to the business entity itself, then the exclusion from the transfer tax is not applicable. The fact that the parties later discover or determine that it is not advantageous to have title in the name of the owners is irrelevant. The taxpayers in this Ruling had presented evidence in the form of the Partnership Agreement, which provided that the Partnership was to acquire and hold title to the real estate. The Department found the Agreement compelling and accepted the taxpayers’ assertion that the real estate had always been intended to be titled in the name of the Partnership and not in the name of the individual taxpayers.

Conversion of GP to LP

The Department also concluded that in order for a confirmatory deed that evidences a mere conversion of a business entity’s business form to be excluded from the realty transfer tax, the ownership interests of the business entity owners must be identical before and after the conversion. When a general partnership converts into a limited partnership, the partners in the limited partnership must have both general and limited partnership interests equal to their proportionate interest in the general partnership following the conversion. In this Ruling, the transaction was not exempt from the realty transfer tax because one of the taxpayers was the sole owner of the general partner, and thus, had a greater interest in the converted entity than what it had in the general partnership before the conversion.

Assignment of Contract from Agent to Principal

The Department determined that when an agent enters into a contract for the purchase of real estate for a principal and subsequently assigns the contract to the principal, the deed would be viewed as only one transfer from the seller to the principal. In this Ruling, the initial contract between the affiliate and the seller established an agency-principal relationship between the agent and its principal; the principal was at all times liable for the agreement; the principal paid the deposit on the real estate; and the agent did not receive any consideration for the assignment of the agreement to the principal. Based on these specific facts, the Department concluded that the assignment of the contract to the principal was not subject to the realty transfer tax.

For more information on this issue, please contact Lauren Taylor at 215.918.3625 or [email protected].