Your thoughts on a strategy to avoid double transfer tax in PA?

Question

So I found a way to avoid the double transfer tax by utilizing 1. an option contract 2. a notice of option contract and 3. an option termination agreement instead of a purchase agreement with the seller. You act as more of a lien holder collecting the "lien release fee" vs. being considered both a buyer and seller at the same time triggering two taxable transactions.

I was curious to know the thoughts of seasoned wholesalers on this or if there was a better way.

Thanks in advance for anyone's input!

I was curious to know the thoughts of seasoned wholesalers on this or if there was a better way.

Thanks in advance for anyone's input!

Shawn Connors · Answer

@Mike Hoherchak

Be careful who you trust.  Some people have a bad reputation for a reason!

Steve Babiak · Answer

On occasion, that strategy is legit and defensible - somebody came along after hearing about the property you got under agreement and made an offer to you that was profitable, so rather than complicating matters with multiple closings, you and seller execute a release from the agreement and seller enters into agreement with the person wanting to buy.  There are expenses besides transfer tax that you are not incurring - title search, title insurance, cost of money, property insurance, U&O inspections, etc. - lots of expenses and even extra work to arrange all of that.

Now, I don't know how many transactions the PA Dept of Revenue can audit; if they audit a large percentage (I don't think that is the case now), then likelihood of being nabbed increases.

Steve Babiak · Answer

FYI - I did not watch the posted video, just commenting on what has been posted here.

Crazy as that sounds @Chris Martin, there is an attorney in the Pittsburgh area named Brad Dornish who has included a similar concept within a home study course that he sells for around $100 titled "Quick turn ..."

http://dornish.net/store/quick-turn-and-wholesaling-real-estate-in-pennsylvania/

The OP might want to buy that course ;)

Opinion of somebody who has been doing RE investment for lots longer than I, is that to do this upon occasion you might be OK, but to do this as ordinary repeated business practice might be taken as a deliberate plan to circumvent tax payment (some might call that evasion). Not suggesting that one does this by any means, but a good tool to have in your arsenal. @Bill Gulley has posted a similar concept elsewhere as well, so not so strange - but it is not a lien per se but a title encumbrance due to option or contract that buyer may record.

One thing to add is that the PA Dept of Revenue does audit property transfers to try to see that transfer taxes are being paid in proper amount. A few years ago, I handed a seller lead to a first time investor (I did not wholesale it - no dollars came to me); he bought the property for low $20K range, with ARV $90K to $95K and around $40K in repairs needed. So that's like a typical 65% deal. This purchase was audited by the PA Dept of Revenue, wanting to see copy of contract and other info because they expected transfer taxes for closer to ARV, and seller wanted me to help straighten it out. By then, the resale had closed at $95K or so, and I drafted a letter for the elderly seller to send to the state. All for them wanting that extra transfer tax.

Duane Ortega · Answer

@Sharyn Mancini

I am not a PA resident, but funded many double closes in PA.  Best recommendation is to talk to title companies and or attorneys.  Feel free to lookup my profile, email us and ask for a list of title companies with whom we've transacted in PA.

Best wishes,

Duane.

Sharyn M. · Answer

I have read/heard so much conflicting information about the transfer tax. As a wholesaler I am expanding my business into PA and I can't get an answer on the following:

Is the transfer tax paid for simply assigning a contract, not double close? Is this a part of the closing costs at settlement? How is it that not many wholesalers are paying this or even know about it?

I have asked a multitude of people in the local REIA, mortgage brokers, and title clerks and some say it does not have to be paid on an assignment, others say it has to be paid even if we aren't settling on the contract.

Thoughts please?

Mike Hoherchak · Answer

Thank you gentlemen for your input. I've never thought about it being tax evasion!

I've personally met the guy in the video. He's one of the big players in the Philadelphia market and has been wholesaling this way for years. Though his explanation makes sense to me about being a lien holder..similar to a gas or electric company putting a lien on a house, it's not considered a transfer taxable event for them. I guess if you package your wholesaling business as more of a deal service provider vs. a whole saler maybe it makes more sense.

But then again, being that I'm a rookie here, I wouldn't know for sure. I guess that's why I was trying to see how viable of an option this would be as I'd like to do the right thing

Raymond B. · Answer

@Steve Babiak,

Thank you for your very useful information.

It is appreciated.

Raymond

Steve Babiak · Answer

@Chris Martin - I don't see many contracts or options get recorded, so that might be why not as many wholesalers have been caught avoiding the transfer tax.  There is a transfer tax statement that is submitted to the county recorder when a deed is submitted for recording; the state is given a copy of that document - and that is what brought about the audit I wrote about earlier in this thread.

Chris Martin · Answer

Well, with my logic if I were investing in PA and looking for deals, I'd be looking for those filings of option contract. That's a sure signal that a wholesaler has a deal. When I am active in the foreclosure space, I watch substitute trustee filings, which is a sure signal there is default... so similar thing. What I see is that some office worker in PADOR will catch on and do a similar thing. Their intent, obviously, is to benefit the state/county and collect rather than the motivation of the filer to not pay. That's why I posted as I did.

My guess is that there are very few filings for these option contracts. Just a guess. Also a guess that the PA DOR won't spend much effort in finding people if there are few instances. I have little insight into the workings of state agencies or quasi-state agencies (e.g. the NC REC) and from what I see, there is little to worry about;) At least south of the Mason Dixon Line;)

Chris Martin · Answer

Wow. @Steve Babiak Thanks for the post. If the PA Dept of Revenue goes to those lengths I'd steer clear of that strategy as a business practice. My 2 cents.

Your thoughts on a strategy to avoid double transfer tax in PA?

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