Senator Ferlo Tightens Realty Transfer Tax Loophole

Jul 8, 2013

In the 2012-13 fiscal year, Pennsylvania brought in $338.7 million in realty tax revenue, but one Pittsburgh-area lawmaker thinks that number should be higher.

State Sen. Jim Ferlo (D-Allegheny) said he thinks he has finally outsmarted what he calls “sophisticated” lawyers and accountants in his second attempt to close a realty transfer tax loophole.

“It’s important that everybody play fair in the Tax Code, and as you know, not unlike the federal tax code, it always seems to benefit those who have the millions and the resources and the sophisticated folks that figure out the Tax Code,” Ferlo said. “So we closed that loophole, and hopefully there will be tax fairness.”

Ferlo said corporations have avoided paying the realty transfer tax using the so-called 89-11 loophole.

By law, when a property is bought, the new owner must pay the transfer taxes only after they record the deed.

According to Ferlo, the corporations created a real estate holding company to transfer 89 percent of the property but avoid recording the deed — and paying the transfer tax — for three years.

In 2012, Ferlo helped pass a law that prevented corporations from forming the real estate holding companies, but that didn’t solve the problem.

“This was a two-part battle that I was involved in the last few years,” Ferlo said. “I already closed the 89-loophole, and that resolved the issue with the realty company holding the property and not recording the deed, and then some even more sophisticated lawyers figured out a way to avoid that exception.”

Ferlo said the corporations found a way to create a subsidiary and put the name of the property in it so they still did not need to pay the transfer tax, but he hopes this new provision in the Tax Code will close the loophole once and for all.

The Department of Revenue projects that the 1 percent tax will raise $4.3 million in the fiscal year 2013-14 and $11.5 million in 2014-15.

Ferlo said the provision will give much-needed money to school districts without raising taxes.

“If you’re a homeowner, you don’t have a way of getting around this, so for the small guy and gal, you know, they pay it through the nose," Ferlo said. "But if you’re a large corporation, and there have been a few large multi-million dollar property sales in downtown and North Shore that have avoided paying this tax, and that means money out of the Pittsburgh school district budget and out of the city budget,”

The changes will take effect Jan. 1, 2014.