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Council committee advances bill targeting real estate transfer-tax dodgers

Legislation has advanced through a City Council committee that would close the transfer-tax avoidance loopholes used by parties to some of Philadelphia's biggest commercial real estate transactions.

Finance Committee members voted Tuesday to bring the bill, introduced in September by Councilman Al Taubenberger, before the full Council for consideration.

The measure seeks to end a practice that has allowed the real estate transfer tax — now 4 percent, but set to increase by 0.1 percent in January — to be paid against a sum that is less than a property's actual purchase price. It also would make it more difficult to avoid the transfer tax by having former owners keep a partnership stake in a property, rather than selling it outright.

"This bill would effectively close the legal loopholes that companies have exploited and assure the city every available dollar it is owed," Taubenberger said during Tuesday's hearing.

The measure will likely appear before the full council Thursday, with a vote as soon as Dec. 8, Taubenberger said. It would go into effect, if passed, on July 1, at the start of the city's new fiscal year.

The legislation was drafted after an Inquirer analysis found that in some of the city's biggest commercial real estate transactions, transfer taxes are regularly paid based on property values less than the actual purchase prices, if the taxes are paid at all.

The tax-avoidance strategies the bill targets are legal and are used at various levels of the commercial real estate market, though they are thought to be most prevalent at the high end, where the tax savings can be most pronounced.

An example is Brandywine Realty Trust's sale this year of the former 30th Street Post Office, now offices, to Seoul-based Korea Investment Management for an announced $354 million. Instead of paying 4 percent of that price — which would have yielded $14.2 million in transfer taxes — Brandywine Realty and Korea Investment were taxed against the property's $184.6 million market value, resulting in a $7.4 million levy, according to a review of documents filed with the city.

It is not possible to predict how much closing the loopholes would generate, said Revenue Department Commissioner Frank Breslin, but full transfer taxes paid in just one additional commercial real estate deal could "have a multimillion-dollar impact on the city's finances."

"Everyone, from the first-time home buyer to the corporate real estate conglomerates, needs to pay their fair share of the realty transfer tax," Breslin said.