On July 3, 2024, the Pennsylvania Commonwealth Court issued an opinion in the case 430 Stump Road LLP v. Commonwealth.
The Court concluded that transfers of interests in real estate companies should be treated the same as transfers of real estate for purposes of real estate transfer tax exemptions. The Court’s decision directly impacts Pennsylvania trusts and their beneficiaries if those trusts own interests in real estate and real estate companies.
Realty Transfer Tax
Transfers of real property and interest in real estate companies are generally subject to real estate transfer tax in Pennsylvania. Transfer tax consists of a state and local component, often 2% of the purchase price or fair market value paid to the state and locality (1% each). Individuals, trusts, and other entities are subject to the transfer tax unless the transfer is specifically excluded.
The Pennsylvania Tax Code provides a list of transactions that are not subject to real estate transfer tax. Examples include certain transfers among family members, transfers to government or non-profit organizations, and specific transfers to shareholders or partners. The Pennsylvania Department of Revenue (Department) has enacted regulations explaining application of the realty transfer tax exemptions to common transactions.
Stump Case
The Stump case involves the transfer of an interest in a real estate company to the beneficiary of a trust. Prior to his death, Allen Kanter established the Allen Kanter Revocable Trust. The primary asset of the trust was a 98% ownership of Stump LLP, which owned real estate in Montgomeryville, PA. Stump LLP is considered a real estate company for purposes of the realty transfer tax.
Upon Mr. Kanter’s death, the trust’s 98% interest in Stump LLP transferred to a marital trust he had established for the benefit of his wife. The Department assessed Stump LLP for failure to pay real estate transfer tax on the transfer of the ownership interest. The Department argued that the transfer of ownership interest was subject to transfer tax since it was a transfer of an entity ownership percentage, and not a transfer of real property. The Pennsylvania Board of Appeals and Board of Finance and Revenue both upheld the assessment, siding with the Department’s interpretation of the realty transfer tax exemptions.
Upon review, the Commonwealth Court determined that the Tax Code does not distinguish between transfers of real property and transfers of interests in real estate companies for the purposes of realty transfer tax exemptions. Additionally, the Court determined that the Department’s regulations excluding transfers by trusts of real estate company ownership interests from qualifying for the exemption were improper. The Court sided with Stump in determining that the transfer of ownership interest should have qualified for one of the listed realty transfer tax exemptions and that the Department had improperly assessed transfer tax on the transfer.
Impact of the Decision
The Court’s decision formally expands the amount and type of transactions that are not subject to realty transfer tax in Pennsylvania. Specifically, the Court confirmed that transfers of ownership interests in real estate companies held by trusts are not subject to transfer tax if they meet the remaining requirements of the Tax Code. The Stump decision will inform planning decisions by individuals looking to protect interests in both real property and ownership interests in entities that own real property assets.
Planning Opportunities
The Petitioner in the Stump case relied on the exemption in the statute that states that a transfer for no or nominal actual consideration from a trustee of a living trust to a beneficiary after the death of the settlor is not subject to the transfer tax. The decision provides for taxpayers the opportunity to plan for the transfer of real estate from a living trust to be made free of the tax. Clients should discuss the potential for the tax savings with their SD account team.
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