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PGH & Federal Property Taxes

Pittsburgh Property Taxes - Investor Guide

*** The information provided herein is for informational purposes only and does not constitute financial advice. Please consult a qualified accountant for verification ***

1. Pennsylvania State & Local Taxes (SALT)

Pennsylvania is unique because the state itself does not collect an annual "property tax." Instead, your tax bill is determined and collected by three separate local entities.

Annual Property Taxes (The Three Layers):

School District Tax: Typically the largest portion of your bill (often 60–70%).
Municipal Tax: Paid to your specific city, borough, or township.
County Tax: Paid to the county where the property is located.

Assessment: Taxes are based on the assessed value of your home, not necessarily the current market price. Each county has its own assessment ratio and "millage rate" (1 mill = $1 of tax for every $1,000 of assessed value).

Utilities, are normaly paid by the tenant (except for multi-familiy houses), these include:

Electric,
Gas: Paid to your specific city, borough, or township.
Water and Sewage: Paid to the county where the property is located.
Garbage:
Landscaping: The tenant is also responsible for maintaining the landscaping to meet local codes

Realty Transfer Tax

When a property changes hands, the state and the local municipality split a transfer tax.

Standard Rate: Usually 2% total (1% goes to the State, 1% to the Local government).
Exceptions: Some cities have higher local rates. For example, as of January 1, 2026, the total rate in Allentown increased to 2.5%. Philadelphia also historically maintains a higher rate (currently over 4%).
Custom: In PA, it is common practice for the buyer and seller to split this 50/50, though this is negotiable.

Tax Relief Programs

Homestead/Farmstead Exclusion: If the property is your primary residence, you can apply for an "exclusion" that lowers your assessed value for school tax purposes.
Property Tax/Rent Rebate: For 2026, seniors (65+) and those with disabilities may qualify for a rebate of up to $1,000 if their household income is $48,110 or less.

U.S Internal Revenue Service

Federal Tax

Federal taxes generally focus on the "income" or "profit" side of real estate rather than the ownership of the land itself.

Capital Gains Tax (When You Sell)

If you sell your home for more than you paid, you may owe tax on the profit.

Primary Residence Exclusion: You can exclude up to $250,000 (single) or $500,000 (married filing jointly) of gain from your taxes if you lived in the home for at least 2 of the last 5 years.
Long-Term Rates: If you don't qualify for the exclusion, gains are taxed at 0%, 15%, or 20% depending on your total income.

Federal Deductions (When You Own)

If you itemize your deductions (instead of taking the standard deduction), you can lower your taxable income:

Mortgage Interest: You can deduct interest on up to $750,000 of mortgage debt (for loans taken out after Dec 2017).
SALT Deduction: You can deduct up to $10,000 total for State and Local Taxes (which includes your PA property taxes and state income tax combined).
Points: If you paid "points" to lower your interest rate during closing, these are often deductible in the year you paid them.

Investment Property Nuances

Depreciation: If the property is a rental, the IRS allows you to deduct the "wear and tear" of the building over 27.5 years.
1031 Exchange: Investors can defer paying capital gains taxes by "swapping" one investment property for another of like kind.

1031 Exchange example:

Reports/Forms to Submit

By the LLC (Annual Informational Reporting)

Even if the LLC has no other business operations besides holding this property, it must file these two federal forms every year with the IRS:

Form 1120 (Pro Forma): The LLC files a "blank" corporate income tax return that acts exclusively as a cover page. The words "Foreign-Owned U.S. Disregarded Entity" must be written across the top.
Form 5472: This is an informational return attached to the Form 1120. It explicitly reports transactions between the LLC and its foreign owner (such as injecting capital, taking money out, or selling the property).
- Warning: The penalty for missing or incorrectly filing Form 5472 is an automatic $25,000.

By the Individual Foreign Owner (Income Tax & FIRPTA Reporting)

Form 1040-NR (Nonresident Alien Income Tax Return): The individual must file this return to report the actual sale, calculate the exact capital gains tax owed on the profit, and reconcile it against the money withheld at closing.
Form 8288-A (Copy B): The individual must attach this specific, stamped receipt (which the IRS sends after closing) to their Form 1040-NR. This is the only way to prove to the IRS that the 15% withholding was paid and to claim a refund if too much was taken.

When Do You Need to Pay the Taxes?

When selling U.S. real estate as a foreigner, the payment timeline is divided into estimated withholding and final reconciliation.

Step 1: The FIRPTA Payment (At Closing)

When: Paid on the day of the closing table transaction.
How: The buyer’s closing agent automatically deducts 15% of the gross sale price right out of your proceeds.
The Deadline: The buyer must mail that 15% cash to the IRS along with Form 8288 within 20 days of the closing date.

Step 2: Annual Tax Filings & Final Settlement

The LLC Deadline: Forms 1120 and 5472 are due by April 15 of the year following the sale (e.g., if you sell the property in 2026, the LLC reports must be submitted by April 15, 2027).
The Individual Deadline: Form 1040-NR is due by June 15 of the year following the sale for non-residents who do not receive wages subject to withholding.
The Settlement: When you file the 1040-NR, you calculate your exact tax. If your 15% withholding was more than the actual capital gains tax owed, the IRS will send you a refund check. If the actual tax owed is more than the 15% withheld, you must pay the difference to the IRS by the filing deadline.

Step 3: Pennsylvania State Taxes

PA Department of Revenue: Pennsylvania treats the LLC profit as individual personal income. You must file a PA-40 (Individual Income Tax Return) by April 15 of the year following the sale and pay PA's flat 3.07% tax on your net capital gains.

What is FIRPTA?

FIRPTA stands for the Foreign Investment in Real Property Tax Act of 1980.

In plain English, it is a federal law designed to ensure that the IRS collects capital gains taxes when a foreign person or foreign entity sells real estate located in the United States.

Because it can be very difficult for the IRS to collect taxes from non-U.S. residents once they leave the country with their sale proceeds, FIRPTA solves this problem by shifting the responsibility to the buyer. The buyer is required to withhold a major chunk of the purchase price at closing and send it directly to the IRS as a "deposit" against the seller's ultimate tax liability.

1. How Much is Withheld?

As of 2026, the standard withholding rates are determined by the gross sales price and how the buyer intends to use the property:

15% of the Gross Purchase Price: This is the standard, default rate for most transactions. Note that this is calculated from the total sales price, not just the seller's profit.
10% of the Gross Purchase Price: A reduced rate applies if the buyer intends to use the property as a personal residence and the sales price is between $300,000 and $1,000,000.
0% (Exempt): No withholding is required if the property sells for $300,000 or less AND the buyer signs an affidavit stating they plan to use it as their primary residence.

2. Who is Considered a "Foreign Person"?

Under FIRPTA, you are subject to withholding if you are a:

Non-resident alien individual.
Foreign corporation, foreign partnership, or foreign trust.
Note: FIRPTA does not apply to U.S. citizens or permanent residents (Green Card holders). It also does not automatically exempt a U.S. LLC if that LLC is owned entirely by a single foreign individual.

3. How the Process Works

The Affidavit: At a typical real estate closing, the seller signs a "Non-Foreign Affidavit." If the seller cannot sign this because they are a foreign person, FIRPTA is officially triggered.
The Withholding: The title company or escrow agent subtracts the 15% (or 10%) directly from the seller's proceeds at the closing table.
Payment to the IRS: The buyer (via the closing agent) must submit this money to the IRS using Forms 8288 and 8288-A within 20 days of the closing.
The Refund: The IRS keeps the money until the seller files a U.S. tax return the following year. If the actual capital gains tax the seller owes on their profit is less than the 15% grabbed from the gross price, the IRS refunds the difference.

Why This Matters (The Hidden Trap)

For Buyers: If you purchase a home from a foreign seller and fail to withhold the FIRPTA tax, you (the buyer) can be held personally liable by the IRS for the tax the seller was supposed to pay.
For Sellers: FIRPTA can create a massive temporary cash-flow crunch. Even if you sell your property at a financial loss, the 15% is still withheld unless you apply for a special Withholding Certificate (Form 8288-B) from the IRS before closing to prove no tax is actually owed.

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