STATE AND LOCAL REAL ESTATE TRANSFER TAXES

The Local Real Estate Transfer Tax Act only governs cities of the second class, second class A, and third class; boroughs; incorporated towns; townships of the first and second class; and school districts of the second, third and fourth class. Further, the Act does not govern home rule jurisdictions. Sixty-one municipalities have adopted home rule charters including five counties, fourteen cities, sixteen boroughs, and twenty-six townships. The taxing authorities not governed by the Act are free to impose a higher local transfer tax rate. For example, real estate transactions in Philadelphia and Pittsburgh are subject to a 4% local transfer tax. Many other local municipalities levy a high realty transfer tax rate.

Real Estate Transfer taxes are not taxes on the property, but taxes on the transaction. The taxes are imposed on all transactions that result in a realty transfer for consideration. Real estate transfer taxes are collected at settlement and required to be paid at the time the deed is recorded in the county where the property is purchased. The law does not provide who must pay the tax. However, the parties to the transaction are jointly and severally liable for the transfer taxes. Usually, the Agreement of Sale provides that all transfer taxes will be split equally between the buyer and seller. The tax is based on the value of the property transferred. Value is the “actual consideration” in “any bona fide sale of real estate at arms length for actual monetary worth.”

The law provides for 22 specific listed exclusions from taxation. The most common exclusion is for transfers between husband and wife, siblings, lineal descendants, and spouses. Further, governmental entities are generally exempt parties.

The constitutionality of the Realty Transfer Tax Act was challenged in the case of Sabolsky v. Messner, 92 A.2d 411 (Pa. 1952). In Sabolsky, the taxpayer contended that the Act was unconstitutionally vague because it did not specify whether the buyer or the seller, or both, were responsible to pay the tax. The court explained that the legislature intended to impose one tax upon the transaction with liability by both parties for payment. It is the duty of both parties to the transaction to see that the tax is paid. This dual responsibility may be discharged as the parties may agree. Accordingly, the court held that the Act was not so vague or uncertain as to be unconstitutional.

A taxpayer stands little chance in a court challenge to a real estate transfer tax rate. As long as the rate is within the perimeters set forth by statute or home rule charter, any such challenge will fail. Most legal challenges to a real estate transfer tax are based upon the applicability of the tax to a particular transaction. These challenges focus on whether the particular real estate transaction was taxable under the statutory scheme or fell within one of the statutorily provided exclusions.

Nonetheless, there have been some successful constitutional challenges to the validity of a local real estate transfer tax ordinance. These challenges were based upon the Uniformity Clause of the Pennsylvania Constitution. The Uniformity Clause provides that, “all taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under the general laws.” The courts have held that the test of uniformity is whether there is a reasonable distinction and difference between the classes of taxpayers sufficient to justify different tax treatment. A taxing scheme does not require absolute equality. A state may create different tax classifications, as long as uniformity is maintained within each class. Where a taxing scheme as set forth by statute or ordinance treats parties in a certain class differently, the statute or ordinance has been held invalid.

For more information, see cases.