Philadelphia Transfer Tax: The Tax is Too High!

A client of mine, a citizen hailing from a different English colony than these United States, commented to me recently that purchasing property in the United States is comparatively beyond complicated. He also said that he believed the amount of fees and taxes associated with property purchase and transfer felt borderline criminal.  

I don’t know if I would go that far, but his point is well taken: It is expensive to purchase property, and today I’ll focus on a tax imposed on transfers in Pennsylvania called THE TRANSFER TAX.

When you go to purchase a property in the Commonwealth of Pennsylvania, you come up with a lump sum of money, take out a loan from your bank, sign thousands of documents and then your title company writes checks to a bunch of different folks. The title company gets a piece, of course. One or more real estate agents usually get some of the bank’s money, then money goes to pay off taxes. One of the taxes you get hit with is the transfer tax.  

According to the Pennsylvania Department of Revenue, “Pennsylvania realty transfer tax is imposed at a rate of 1% on the value of real estate…transferred by deed.” 1 percent does not seem so bad, until you realize that there is also a local realty transfer tax. Whatever county you are in will also impose a tax on the transfer of property, and here is where it can get very onerous.  

The average local county transfer tax in the state hovers right around 0.5%. However, in the City of Reading, you will pay a whopping 4% on top of the 1% imposed by the state. Meaning, if you purchase a property for $300,000, in order to record that deed you are going to write a $15,000 transfer tax check. Philadelphia, while not as bad as Reading, has one of the highest county transfer taxes in the Commonwealth, currently set at 3% of the value of the home.

Clients unfamiliar with the tax will often suggest that, because the tax is assessed based on how much the buyer is paying for the house, why don’t we just claim we are buying the house for $1, then we only owe 4 cents!?  Unfortunately, it does not work this way.  

Enter the fair market value (FMV) and the common level ratio multiplier (CLR). Each county in PA has a different sort of method for calculating this, but here is the gist: Every property in the Commonwealth has an assessed FMV, based on a number of factors not relevant here.  Each county also has a CLR. A CLR is a number that the county multiplies the FMV by to determine the MINIMUM transfer tax that someone will have to pay to take possession of the property.  

So, let’s do an easy example: Say you buy a property in Philadelphia for $100,000. You want to figure out how much transfer tax you are going to pay. Let’s say that the FMV of the property is also $100,000 (for Philadelphia County, look here for FMV figures). You then need to know the CLR, so you go here and see that Philadelphia’s CLR is 1.01. So you multiple the FMV ($100,000) by the CLR (1.01) and you get the amount ($101,000) that you are going to pay transfer taxes on.  Then we take that amount and multiply it by four percent ($101,000 x .04) and we get the total amount of transfer tax ($4,040), and of that, $1,010 goes to the Commonwealth and $3,030 goes to the County.  

Not all transfers generate the need to pay transfer tax, and in my next post, we will talk about THE EXCEPTIONS.

As always, if you have any questions about real estate in Pennsylvania or New Jersey, especially in Philadelphia and surrounding counties, contact me at Joe@consolelegal.com. Console Legal is here for you!