Transfer Taxes on Double Closing

[Account Closed]

How many Wholesalers doing Double Closings are paying the Real Estate Transfer Taxes?

These can be quite expensive in some places. For instance The State of Pennsylvania charges 1% of the sales price and the municipality and school district USUALLY charge 1% between them for a total of 2% (i.e. 2% X 100,000 = $2,000). By custom, the buyer and seller split the cost.

Before a deed, security instrument, or other writing can be recorded in the office of the clerk of the superior court, the real estate transfer tax must be paid. If a Wholesaler does a double closing in PA the transfer costs could amount to 4% - Failure to pay those costs will create a problem for the end buyer and anyone who subsequently buys from them.

Many Counties are now looking at increasing the rates in order to obtain more revenue. Who knows how much you should be paying in each State and particular Counties and Cities?

When you look at possibly paying 4% in transfer costs on a double closing (or at least half of that - as the end buyer would pay half) does paying $10,000 on a $500,000 house seem a bit dumb? Especially when you can keep closing costs down to under $1,000 by not double closing? 

How are wholesalers managing the payment or non-payment of transfer tax?

[Chris K.]

@Account Closed

Very good question. Right now, probably the best "legal" way to do it is to use an option contract. The basic idea is to have the seller grant you an option to buy the property. You record a memorandum of option with the recorder of deeds to let the world know that you have this option. You do this for various reasons including preventing the seller from selling the property to another buyer without your knowledge. After you record the memorandum, you then go around finding a buyer. There are different ways to handle it from there, but all options basically involve you releasing the option for a fee so that the buyer can buy the property from the seller. Done correctly, this method will not trigger a double transfer tax. 

THIS DOES NOT necessarily mean that you as a wholesaler are otherwise complying with the law. This is especially true if you try to wholesale without being a salesperson or a broker. Now some argue that the government is infringing on your due-process rights by preventing you from trying to sell your property rights. You could try to make that argument. But I’m going to guess that the Commonwealth of Pennsylvania and their attorneys have more time and money than you when it comes to litigation. 

A lot of wholesalers decide to just ignore the taxes and hope for the best. For example, many wholesalers just assign the contract to the buyer and hope that no one notices. Since the Department of Revenue relies heavily on recorded documents to collect realty transfer taxes, many wholesalers are able to avoid prosecution. But if you get caught, you are potentially dealing with tax-evasion charges. 

If I was a wholesaler, my biggest concern would be a disgruntled seller or buyer reporting your actions to the Pennsylvania Real Estate Commission or the Attorney General’s Office. Filing a complaint with them is free and they do try to look into all the complaints (even if it takes a while to start). If you get caught after only a few deals, hopefully you can plead ignorance and just pay a fine of few thousand dollars. But if your entire business model depends on ignoring realty transfer taxes or licensing laws, then you might face a bigger problem. 

Disclaimer: While I’m an attorney licensed to practice in PA, 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 as legal advice. Always consult with your attorney before you rely on the above information