Pennsylvania Wholesalers - How do you handle transfer taxes?

Question

I tried searching BP for this answer but haven't figured it out yet.

If you're wholesaling a deal in Pennsylvania, where you must pay a 2% transfer tax, how do you structure this in your deal/agreement? I can't imagine a buyer would be willing to pay all of it since that could quickly kill their spread... right?

I read the bulletin PA released back in 2008 and it seems clear.. even if you are assigning a contract, you are still required to pay the transfer tax.

Any info you can provide would be greatly appreciated.

Chris K. · Answer

Just to be clear, are you asking about situations where you need to pay additional transfer taxes? The famous 2008 memo largely deals with situations where an assignment may constitute a taxable event.

Dealing with that issue really depends on the precise situation. But that is probably something to discuss with an attorney.

Kyle Ebersole · Answer

Hey Brad, I've wholesaled a few and it varies between me covering 1% and the buyer covering the other 1%. But I've also just stated expectations from the beginning that the seller is required to pay their portion of the transfer tax and rarely get any push back. Kind of whatever works is what we roll with. Just don't be afraid to have the seller pay their portion.

As was stated already, rarely will someone turn away from a deal because of a few grand, and that includes the seller!

Alan Asriants · Answer

In a standard Agreement of Sale using PAR forms (What Realtors use), transfer tax is split 50/50 between seller and buyer.

In Phila its 2.14% to each side and outside counties it is 1% to each side.

If a Buyer wants to be competitive or is looking to snag a deal and give the seller a "bottom Line" they will offer to cover the transfer taxes.

Alejandro Ferro · Answer

Hi, I've done some deals in Philly and that transfer tax is no joke. It can definitely add up. When it comes to covering the cost the seller is going to have that cost in whichever type of transaction. On the market or off it is a cost that has to be considered. I just take that cost into consideration when it comes to the offer. I make it clear to the sellers that we would pay it and cover the cost but that going to be reflected in my offer amount. The same goes for the buyers the cost is taken into consideration.

Don't think too detail about that one as it has to be paid no matter what. It is just as another cost to be taken into consideration in the analysis.

Chris Pelc · Answer

I agree with Alejandro on this.

At the end of the day someone needs to take the hit on the transfer tax. Most of the deals that ive sold have been full transfer tax to the buyer. But with that being said, the numbers need to make sense while considering the buyer is covering full transfer. Philadelphia is the worst at 4.28%, but the suburbs are a lot better such as only 2% in Delco, and Montco. When you are negotiating with the seller, be up front with them in that if they are unwilling to negotiate paying for transfer tax, your offer price will reflect that. If you are able to negotiate split transfer tax between the seller and buyer, it might be a good compromise for both parties.

But to be completely honest with you, if the numbers make sense and you have a nice spread on the deal; a buyer generally wont turn away from the deal over a few thousand dollars.

Chris K. · Answer

@Brad T.

In the 2008 memo, the PA Department of Revenue looked at when assigning deals gets taxed. Say a seller and a wholesaler make a deal for $2 million. Then the wholesaler assigns this deal to a buyer for $3 million. The buyer ends up buying the property for $3 million.

So, what gets taxed? If we don't tax the assignment, it's $3 million. But the Department says sometimes this assignment should be taxed. They argue it's really two sales – first to the wholesaler for $2 million, then to the buyer for $3 million. That makes it $5 million.

If you are asking your situation falls under that sometimes situation, folks on BP cannot answer that for you. It depends on the actual facts.

Disclaimer: While I’m a licensed attorney, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Brad T. · Answer

I believe I am, yes. But to be honest, I'm still trying to understand how that 2% transfer tax would play in a typical wholesale deal.

For example, A traditional sale is clear to me; Typically, the buyer pays their 1%, the seller pays their 1%, the 2% requirement is met, and PA is happy.

But as a wholesaler, simply assigning my rights to the contract, how much would I be responsible for if its a A>B>C transaction?

Buyer= 1%

Seller= 1%

Wholesaler= ?

Of course, I understand who pays what is negotiable; I'm just trying to figure out what will be due at closing (% wise). Is the wholesaler responsible for 1%?  an additional 2%? That's what Isn't clear to me.

Hopefully, that makes sense.

Bud Gaffney · Answer

Following! Seems like it would be very labor intensive. Worth it?

Pennsylvania Wholesalers - How do you handle transfer taxes?

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