Pennsylvania’s New Tax Collection Power

Just last week a new law went into effect in Pennsylvania with very little fanfare but it’s likely to have a major impact on anyone who buys, sells, or owns real estate in the Commonwealth.

Act 93 changed the tax lien law, making real estate tax judgments personal. What does this mean? Before this new law took effect, when a property owner failed to pay their tax bill the municipality would obtain a lien against the property. But because of the way liens worked, this was not a judgment against the owner, only against that one property. This procedure led to a situation in which many property owners simply did not pay their real estate taxes. In cities like Philadelphia, where a lot of rental properties are owned by small investors or passed down between family members, this has created tax collection issues. Since the municipal lien didn’t affect the owner’s personally, many owners found it advantageous to simply not pay. If a property owner owed more than the property was worth, they could just kept collecting rent until the Sheriff Sale, if it ever happened. The municipality never got paid what was owed, and personal liability never attached.

Under the new law, the idea is that the lien will also be against the owner, not just the property. This means you will not be able to finance or sell a different property until the lien on the tax delinquent property is paid. Additionally, your own home may be at risk, and you can no longer just walk away from a property without ever paying the tax due. This makes perfect sense; it’s finally giving local municipalities the ability to collect outstanding taxes which is something cities like Philadelphia have spent years clamoring for.

Unfortunately, Act 93 creates as many issues as it solves, something frequently seen in real estate legislation coming from Harrisburg. This new law will clearly mean more work for title insurance companies and Realtors, many of whom didn’t see this coming. There are also open questions with regard to how this will affect large entities and REO properties. Clearly, the banks have foreclosed on numerous properties with tax delinquencies. Having those taxes paid will be a boon to local government, but a nightmare for searchers. Additionally, it’s easy to imagine the situation where a homeowner lacks the equity to both sell a property and clear the lien arising from another investment. I fear in many parts of the Commonwealth this could really hurt the ability of sellers to get out of low equity or distressed properties.

Finally, we are already seeing the impact of this legislation in lease-purchase and rent-to-own deals. The threat of personal judgments being transferred from out of the county to attach to the seller’s property creates the need for a whole new level of due diligence.

Of course, we’ve always recommended to our clients that investment properties should rarely, if ever, be held in their personal name. Using LLC’s, LP’s or corporations as an entity to own your investment property can provide numerous benefits and protection from this new law is only one of them.

If you would like to discuss how this new law may affect you, or how to best structure your portfolio in light of these ongoing changes, please feel free to contact H. Adam Shapiro of Danziger Shapiro and we will be happy to review and discuss your situation with you.