Have you seen a deed that stated $1 is the price paid for the property?
Why does this happen? Are people avoiding transfer tax if they do this? Today we are taking a look.
WHY $1
In order to pass ownership rights, ‘consideration’ must be part of a deed.
Often times a sale price of $1 (or $10) is stated because a transfer was done for:
- Gift
- Divorce settlement
- Settlement of an estate
- Investor who moves a property from one entity to another
If you are purchasing real estate, and would prefer to shield the sale price from being easily seen, then you can request that the deed state $1.
When a deed without the stated compensation is recorded, a state form (REV-183) must be attached which shows what amount the transfer tax is being paid on.
If the sale is not an arm’s length transaction, and the selling price does not represent the fair market value, then transfer tax is computed on the assessment value, times the Common Level Ratio. These ratios are updated every year to provide an ‘Equalizing’ factor for County assessments that become outdated over time. This common level ratio is then uses to attempt to reach the fair market value for that property.
If the deed is pulled for the property, the state form for transfer tax will be attached, and the sale price can be figured based on the amount of the tax. So this will not keep it totally private, but will make it harder for the public to see what you paid for it.
If you plan to resell the property in the near term, it can be useful to request a privacy deed, and make it harder for potential buyers to see the price you paid for the property.
WHEN IS TRANSFER TAX DUE?
Examples on when transfer tax is due:
- Transfer of Deeds
- Long-term leases (30 or more years)
- Easements
- Life estates
- Entity transfers
- Transfers of interest in real estate company (where transfer is 90% or more)
In Pennsylvania, some transfers are exempt from tax, which are:
- Certain transfers among family members
- To governmental units
- Between religious organizations
- To shareholders or partners
- To or from nonprofit industrial development agencies
- Deeds to burial sites
- Certain transfers of ownership in real estate companies
- Family Farms
WHAT ABOUT ENTITY TRANSFERS?
Most likely you have seen sales where it appears there was an arm’s length transaction (which means the buyer and seller were unrelated and did not have some other side deal), but it does not appear that the property sold for fair market value.
PA law does require transfer tax to be paid on transfer of 90% or more of a Real Estate Company (A company whose primary purpose is owning and operating real estate).
There are examples of large transfers where a master company is sold, along with all real estate
holdings, and the transfer tax is reduced by the structure.
For Example:
Company A is an Integrated Property Management and Real Estate Investment Group. They decide to sell all assets to Company B and retire. All the real estate owned is in a separate LLC for each property, which is all owned by one master LLC that also owns the property management company.
The master LLC is assigned a value that may be higher than fair market value. (Owners may charge themselves a very high property management fee of 15%, in order to increase profits in the PM company, and decrease value on the real estate, in preparation for this kind of sale).
The real estate in each LLC is then transferred for less than the fair market value, with transfer tax being paid on the Assessment Value X the Common Level Ratio. The book value of the PM business is purchased without transfer tax being paid, which for larger asset sales can be quite significant.
This may be one reason why you would see a transfer for what appears to be much less than a fair market value.
WHAT ABOUT BARTERING?
Bartering may also be a reason you would see a property recorded for $1 or lower than a fair market price.
Bartering is a type of sale involving the exchange of property for another. Bartering with real estate would still be subject to paying transfer tax on both properties.
Income Gain from bartering is also taxable for Pennsylvania personal income tax purposes. Gain from bartering is the difference between the adjusted basis of the relinquished property and the fair market value of the property received.
CONCLUSION
Understanding the reasons why sales are recorded as $1 can be helpful as investors seek to stay on top of the real estate market and understand transfers, track comparables and keep a pulse on real estate values.
Many investors we work with struggle to understand all the details of real estate and make a sound decision. We provide insights in the market in order to help them make strong choices to build their long-term investments.
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