State shuts loophole on property sale taxes
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By January, buyers of some of Downtown's biggest skyscrapers no longer will be able to exploit a loophole in state law to avoid paying deed transfer taxes that in some cases cost the city and the school district millions of dollars in revenue.
Gov. Tom Corbett earlier this month signed into law an amendment to the state tax code that prevents real estate buyers from using so-called "89-11" transactions to get around the tax.
State Sen. Jim Ferlo, D-Highland Park, spearheaded the amendment to close the loophole after the group that bought the U.S. Steel Tower last year for $250 million employed the technique and avoided $10 million in deed transfer taxes to the city, the Pittsburgh Public Schools, and state.
The new law takes effect Jan. 1.
"We must not tolerate overt tax avoidance policies in the tax code that let big business off the hook and leave everyone else holding the bag," Mr. Ferlo said in a statement. "By closing just this one loophole, we've made Pennsylvania a fairer state to live in and will help to reduce the burden on taxpayers."
In an "89-11" transaction, a buyer, instead of purchasing a property outright, will acquire 89 percent of the interest in the company that owns it. After three years, the buyer will purchase the other 11 percent. Real estate deals are now subject to the deed transfer tax only if 90 percent or more of the interest is transferred within three years.
Under the new law, if it is clear that more than 90 percent of the interest will be transferred after three years, it will be treated as a taxable transaction.
The state Department of Revenue determined last year that the U.S. Steel sale to a group led by Mark Karasick, a New York City real estate investor, was an "89-11" transaction that was not subject to the 4 percent deed transfer tax levied in the city. That cost the city $5 million in tax revenue, the school district $2.5 million and the state $2.5 million.
Mr. Ferlo said the amendment will not take effect retroactively, meaning the taxing bodies will have no way to collect that money.
U.S. Steel Tower is not the only Downtown property where the tax has been an issue. An investor group that purchased CNG Tower, now known as EQT Plaza, in 2000 did not pay $2.7 million in transfer tax in an $82 million transaction by technically buying the partnership that owned the building rather than the property itself.
City and school district officials were elated to learn Thursday that the loophole had been closed.
Michael Lamb, the city controller who has spoken out against "89-11" transactions in the past, said eliminating the loophole "will be greatly beneficial" to the city in terms of tax fairness and revenue.
"This was one that was just being abused by the real estate industry as a way to avoid the tax," he said.
School district solicitor Ira Weiss said Mr. Ferlo did the taxing bodies a "huge service" in getting the law changed.
"This eliminated the loophole that a lot of folks were using and frankly beating tax bodies out of much needed revenue," Mr. Weiss said.
Mr. Lamb said he is not aware of any other real estate transactions in the city since the U.S. Steel deal employing the loophole. In fact, the more recent transactions, including the $179.4 million sale of PPG Place, have included full payment of deed transfer taxes.
The law also exempts transactions involving deeds in lieu of foreclosure from paying the tax. That happened last year when McKnight Realty Partners acquired the Henry W. Oliver Building, Downtown. Mr. Lamb has said the exemption was a valid one, given the property's high vacancy rate and significant mortgage.
The deed transfer tax, which varies from 2 percent to 4 percent depending on the municipality, is to be paid on all property sold in Allegheny County. In Pittsburgh, 2 percent goes to the city, 1 percent to the school district and 1 percent to the state.
First Published July 13, 2012 12:00 am