Transfer taxes on contract assignments?

[Jerry Kisasonak]

I recently had someone tell me that you have to pay transfer taxes when you assign a contract. Is this true?

I've done contract assignments and have never paid any transfer tax. In my mind, there is no transfer of ownership only transfer of interest so there should be no transfer tax. Of course, upon closing the seller and the end buyer would have to pay the tax in accordance with how the payment of transfer tax is stipulated in the agreement - the agreement that was assigned.

I'm putting this out to my trusty BiggerPockets folks to set things straight. Thanks and advance... You guys (and the BP website) are wonderful!

[Steve Babiak]

Two links below cover transfer taxes. The short answer is yes, and that is covered in the second link (section 91.170).

http://www.pabulletin.com/secure/data/vol37/37-50/2306.html

http://www.pabulletin.com/secure/data/vol37/37-50/2306a.html

Some say that in light of that, two separate closings makes more sense. But lots of title companies don't seem to enforce that rule ...

EDIT: the above is specific to Pennsylvania.

[Jerry Kisasonak]

Steve Babiak I'm amazed that by this. If there is a tranfer tax triggered when interest in the property changes from person to person, entity to entity, or any combination thereto, that would make wholesaling lease options and all the other creative wholesaling techniques transfer-taxable. Maybe it's just me that is finding this odd...

[Mike LaCava]

Yes it is true in PA. Not all states though. One of the main reasons is Investors would buy in a trust and beneficiaries would change from seller to buyer & avoided paying the tax. Trust's are now audited at a 50% rate so not a good option in PA to purchase under. I just found this all out as I am looking to invest there. Not sure where you are located but the attorney I received the information is spot on with his research and entity structures.

[Jerry Kisasonak]

Mike LaCava I am in the Western Pennsylvania/Pittsburgh area Mike.

I remember hearing something about calling an assignment fee a "real estate consultation fee" or something to that effect. This must have been in an attempt to circumvent the PA transfer tax on assignments. I wonder how the paperwork would have to be written up then? This consultation fee certainly wouldn't fit neatly into the standard P&S and assignment agreements. I am going to have to talk with some local wholesalers that I know to see how they are handling this.

I suppose all this has taken me by surprise because in all my talks and deals I've never had this come up and my closings went off allegedly without a hitch.

[Steve Babiak]

The PA Dept of Revenue has a number of examples of transfers that are taxable when structured in one manner, but not taxable if structured in a slightly different way. One example they don't give involves what's called a reverse 1031 exchange; a normal 1031 exchange does not trigger extra transfer taxes, but in a reverse 1031 exchange the QI has to take title for a brief period and THAT triggers the extra transfer taxes too. But in the end, they are looking at activity where payment of taxes is somehow being circumvented, and trying to close the loopholes.

And the PA Dept of Revenue audits closings for transfer taxes paid. Last year I assisted a seller in dealing with the Dept after they got a letter requesting explanation for why transfer taxes were less than 1/3 of what the Dept expected to be paid; that was a 65% of ARV minus repairs sale, so the sale price was really low due to ~ $40K rehab needed. They wanted to see copies of the contract and closing statements among other things.

When the gov't needs extra money, they can either draft new ways to collect, or they can do a better job of collecting that which is already due but not being collected. They can just choose to do more audits to try to get more revenue.

[Steve Babiak]

Jerry Kisasonak - you should look into attorney Brad Dornish out that way; he has a website where he offers some reasonably priced training materials - including some wholesaling material. He outlines one technique that does effectively avoid the extra transfer taxes, but it won't work in every circumstance, and an expert (not me) from my part of the state didn't think it would fly if used too frequently - but on occasion it would do the trick.

[Mike LaCava]

I also recommend Attorney Brad Thornish. I have not used his services but hear great things about him.

[Jerry Kisasonak]

Steve Babiak Mike LaCava The thing about this that I take issue with is that you are assigning a CONTRACT, which has nothing to do with tranfer of ownership of real property. If you assign a contract and the end-buyer doesn't close, you don't have to pay the tax. But if the end-buyer does close, you do. If the assignment itself is going to be considered a transfer and taxed accordingly, it should remain in effect in both of the aforementioned situations.

What is more, if the assignment itself is to be considered as a transfer you would also get into issues with the chain of title. Then you'd have all kinds of other implications like how the title was taken, who would be on the hook for title issues, who would the seller foreclose on if owner financed, etc etc. But the fact is, title [b]isn't taken or transfered in an assignment.

[Mike LaCava]

I agree with you on all your points and it just doesn't make sense. You should check with Brad because I believe it could be a serious offense. Just another anti-investor govt policy. Let us know how you make out.

[Bill Gulley]

Wow! I glad God did not put me in PA!

I skimmed the second link Steve provided, indicating it was more relevant.

While reading the rest of the posts, I thought:

Take an option, with the agreement that the seller will agree to sell to the public, in blank at that option price. Find your buyer. Make a new sale contract between the seller (who could have already signed) and list the buyer, closing on that contract. The option is not taken and is released. Wonder now what you could charge to the new buyer to release the option, a release fee.

The tax would be due between the seller and buyer. If the option were assigned tax would be due, but if it is not taken seems no tax would be imputed. If nominal consideration was given for the option, if a tax was imputed it seems that would be the basis. Just looking at other examples where a deed or equitable interest was not conveyed there was no tax due. Not sure how they would view backing out with a profit.....well, I do, if you make money, they want a slice, but not sure that was covered. Just a thought. :)

[Jerry Kisasonak]

Mike LaCava Mike, I wouldn't say it's a serious offense. They are not going to send you to real estate jail or anything crazy. They'll likely simply demand that you make good on all the taxes you didn't pay, with penalties and interest of course.

Bill G. I thought your idea of having an option and executing what I would call a "Consideration for release of option" with the end-buyer was very creative.

As investors, we have to be very careful about calling anything a "fee" or or "commission." If any of you followed the "Document store fee" or "Administrative commission" that real estate brokerages charge sellers and buyers to store documents of all consummated deals you're well aware of how the real estate commission has taken issue with certain wording. Being an agent, I clearly remember how many times our office had to scrap the forms and rewrite them due to ambiguity and possible misinterpretation. And this is for licensed agents! For investors the REC would certainly be even more strict, if not totally unreasonable.

Someone says, "This is ambiguous and may be misinterpreted." The other guy says, "What does ambiguous mean and how could I possibly misinterpret it?"

By the way... how the heck did I depart this far from the topic of transfer taxes???

[Bill Gulley]

Jerry, you're not too familiar with my being a stickler on compliance or phraseology and terms I suppose (LOL), a release fee is a common charge, no license required, compensation for backing out of an option to allow another sale.

If you are a broker, you have this cat skinned, simply do an exclusive listing on a flat fee basis, be sure to stay away from any net listing. Good luck!

[Jerry Kisasonak]

Bill G. Thanks for the comments. It is funny that you should mention to NOT list them as net listings. I've had several brokers in my area actually recommend that I put wholesale deals on the MLS as nets, with no mention being made as to an exclusive listing agreement with a flat fee. What is your take on the flat fee listing versus the net listing?

I am divided on listing wholesale deals on the MLS. I've had other wholesalers tell me it would suit me better to work on building up my buyers list, and if that list/contacts didn't procure a buyer, to partner with other wholesalers who have a large buyers list and give them a cut out of the deal.

I suppose on a flat fee listing I wouldn't have to split the commission 50/50 if a buyers agent brought a buyer - just work out a favorable commission structure prior to listing it.

[Bill Gulley]

Are you a broker or an agent? Get past the broker if you're an agent first.

For the non-Realtor types, a fee paid to a Realtor over a net amount due the seller, allowing the seller to only receive a net amount with the Realtor gets everything above that is a violation of RE laws and/or Realtor business ehtics, wholesale deals are touchy with a license. The thinking here is with the fudiciary role with the seller, a Realtor could tell them it's worth 65k, do a net listing and sell for 80k, unethical.

A flat fee is perfectly fine. The seller gets the full price and pays a flat fee.

If, in your area, if you must list on the mls you certainly can, you also arrange and control the split in some places the commission split does not have to be equal, it could be 90/10, in which case no agent would be knocking the door down to show it. Other remarks, like fixer upper to professional buyer might keep many from looking too.

My thinking here is that you had to list on the mls, but you don't want others involved.

But really, my thought above was shorter, less involved, you could do a permission to show with a flat fee and contract with the end buyer.
Or, list it when you have your buyer in hand, I've seen several go on the mls and minutes later it says....under contract!

BTW, with a flat fee, you can drop your fee down if needed to make a deal.

Realtors don't need to take title to flip for say 10%, what ever would be customary in your area or reasonably allowed. Just watch the net listing arrangement issues.

[Steve Babiak]

The "release" (as Bill suggested) is one of the techniques that is suggested by Brad Dornish (and is the same technique that my one advisor has indicated wouldn't fly if used too frequently).

As far as your assignment of contract not giving you title - I agree. The PA Dept of Revenue even agrees that you did not take title - but they are using a rule other than taking title to claim that the transfer tax is due. Assignment of contract fits exactly under Example 1 of section 91.170 from that second link that I supplied earlier. This ruling has not been challenged (at least not that I am aware) since it was put into place around 2008.

[Jerry Kisasonak]

Steve Babiak If they are going to claim interest in real property as a transfer-taxable event this would extend to land contracts/CFD, lease/options/RTO and any other form of control without ownership, and this would be without regard as to whether or not the actual agreement has consummated. All the RTO agreements that fell through, which is probably 95% of them, are therefore transfer-taxable. I'm sure nobody is paying these taxes.

[Steve Babiak]

For the seller I mentioned earlier where I assisted them with correspondence from the PA Dept of Revenue, the Dept presumed that it was an installment sale of some sort, and were seeking to collect some more transfer taxes. Again, just because people have for some time been practicing things that circumvented these transfer taxes, does not mean that those practices are exempt from transfer taxes. As somebody else posted elsewhere, just because you were able to drive 70 MPH and not get a ticket does not mean you won't get ticketed for driving that fast in the future - getting caught is what will lead to the ticket ...

And I agree that there are a bunch of things where we don't want to see transfer taxes - but just because we want to see something does not meant it will be that way. And again, the enforcement of some of this isn't 100% of the time, and until audits occur on 100% of transfers there will be those who get away without paying.

[Troy Sheets]

@Steve Babiak

@Steve Babiak

Bringing an old thread back...@Steve Babiak

Is the better route to put the property under contract in the name of an LLC and then sell the LLC or does this still not negate the transfer tax? I'm guessing in some cases, depending on the cost of the property, it'd be cheaper to pay the transfer tax than form the LLC.

[Troy Sheets]

Found this gem below on another thread @Steve Babiak responded in. Yikes! It looks like there is no legitimate way around the transfer tax in PA?

"One other additional note, that is Pennsylvania specific (at least I believe PA is the only place doing this), is that the PA Dept of Revenue will be looking to collect real estate transfer taxes on the sale of the LLC, even though the company name on the deed isn't changing! In some ares of the state, it could be as much as another 5% added in the RTT (although the state's cut is only 1%).

For reference, go to page 22 of the PDF at this next link, and read section 91.113:

And also read rule 91.202 on page 63 of that same PDF.

(As an aside, on page 46 of that same PDF, you will find the rule 91.170 that is used to collect transfer taxes on assignment of contract in Pennsylvania. And on page 52 of that same PDF, you will find rule 91.192 that explains why on a HUD the buyer pays the entire transfer tax - Federal Gov't seller is exempted.)

Two links below cover transfer taxes in PA:

Those last two links basically give you what was in the PDF above, in case you can't view the PDF for some reason.

here is the state's website with details on RTT:

here is a link showing variations in RTT across the state:
http://www.anytimeestimate.com/PA_REAL_ESTATE_TAX/pa-transfer-tax.htm "

[Jerry Kisasonak]

Investors are getting around this by using option agreements and charging the end buyer a release fee/consultation fee/services rendered fee/etc. That way the investor is never on the sales agreement. You can also use this release method if you have a sales agreement with the seller. In that case though, you need to take an additional step and have the seller sign a termination of sales agreement document, and then the seller will enter into contract with the end buyer. The nice thing about doing things this way is that the buyer can use traditional lenders to fund the deal - a cash buyer isn't necessary (although always preferred). The investor's profit will be a separate check from the buyer.

[Troy Sheets]

Originally posted by Jerry Kisasonak:
Investors are getting around this by using option agreements and charging the end buyer a release fee/consultation fee/services rendered fee/etc. That way the investor is never on the sales agreement. You can also use this release method if you have a sales agreement with the seller. In that case though, you need to take an additional step and have the seller sign a termination of sales agreement document, and then the seller will enter into contract with the end buyer. The nice thing about doing things this way is that the buyer can use traditional lenders to fund the deal - a cash buyer isn't necessary (although always preferred). The investor's profit will be a separate check from the buyer.

Great info, thanks @Jerry Kisasonak

[Troy Sheets]

Originally posted by Jerry Kisasonak:
Investors are getting around this by using option agreements and charging the end buyer a release fee/consultation fee/services rendered fee/etc. That way the investor is never on the sales agreement. You can also use this release method if you have a sales agreement with the seller. In that case though, you need to take an additional step and have the seller sign a termination of sales agreement document, and then the seller will enter into contract with the end buyer. The nice thing about doing things this way is that the buyer can use traditional lenders to fund the deal - a cash buyer isn't necessary (although always preferred). The investor's profit will be a separate check from the buyer.

@Jerry Kisasonak

I've been thinking about your post and have a couple questions if you don't mind? What exactly is an option agreement? An option to purchase the contract you have with the seller? An assignment option? What/how would you structure the release/consultation/services rendered fee you mentioned? It's going to be questioned by people, what are you releasing or what service did you render? Just curious how to answer before it happens, lol.

About the only thing I did understand was the termination of sales agreement but that seems dicey at best, it sounds like you'd have to step out of the middle of the sale and connect your buyer with the seller and tell the seller, "By the way, this person is buying your house for $10k more than I'm paying you and I'm keeping the difference". Sounds like that'd blow up in your face 9/10 times?

[Steve Babiak]

Originally posted by @Troy Sheets:

Originally posted by Jerry Kisasonak:
Investors are getting around this by using option agreements and charging the end buyer a release fee/consultation fee/services rendered fee/etc. That way the investor is never on the sales agreement. You can also use this release method if you have a sales agreement with the seller. In that case though, you need to take an additional step and have the seller sign a termination of sales agreement document, and then the seller will enter into contract with the end buyer. The nice thing about doing things this way is that the buyer can use traditional lenders to fund the deal - a cash buyer isn't necessary (although always preferred). The investor's profit will be a separate check from the buyer.

@Jerry Kisasonak

...

About the only thing I did understand was the termination of sales agreement but that seems dicey at best, it sounds like you'd have to step out of the middle of the sale and connect your buyer with the seller and tell the seller, "By the way, this person is buying your house for $10k more than I'm paying you and I'm keeping the difference". Sounds like that'd blow up in your face 9/10 times?

Troy, you have to share the wealth to get this to work. You entice the seller to do this by giving them a bit of the money, so that they agree to sell for a little more to the end buyer than what you had them agree to sell to you.

Don't let greed get in the way ...

[David Krulac]

@Jerry Kisasonak

The Revenue Dept can pursue criminal charges for tax evasion and you could go to jail. this would only happen in extreme cases where you have done multiple deals without paying the transfer tax and are refusing compliance. In general they are just looking for the transfer tax and any interest and penalties, but not jail time. There have been expansions dealing with types of transaction that are subject to tax, sometimes not always intuitive.

[Phil Z.]

Originally posted by @Steve Babiak:
Two links below cover transfer taxes. The short answer is yes, and that is covered in the second link (section 91.170).
[url]http://www.pabulletin.com/secure/data/vol37/37-50/2306.html[/url]

[url]http://www.pabulletin.com/secure/data/vol37/37-50/2306a.html[/url]

Some say that in light of that, two separate closings makes more sense. But lots of title companies don't seem to enforce that rule ...

EDIT: the above is specific to Pennsylvania.

Which department of the law code are those links from?