What are real estate transfer taxes?

There are a lot of expenses involved in buying or selling a home. In addition to paying closing costs, real estate agent commissions and attorney fees, you may also have to fork over money for a real estate transfer tax, which is a tax on the transfer of a property’s title or deed.

The rules of real estate transfer taxes vary by location. In many areas, the seller is responsible for payment, while in others, the buyer pays. And in some states, transfer taxes aren’t levied at all. Here’s what you need to know about real estate transfer tax, and how much you may be liable for.

What are real estate transfer taxes?

A real estate transfer tax, sometimes called a deed transfer tax or documentary stamp tax, is a one-time tax or fee imposed by a state or local jurisdiction upon the transfer of real property. In other words, it’s a fee charged by the government to legally transfer ownership when a home is sold. Usually, this is an “ad valorem” tax, meaning the cost is based on the price of the property being sold.

Transfer taxes are applied to a change of ownership for any type of property that requires a title, as stipulated by a deed or other legal document, according to Paul Miller, CPA and managing partner of Miller & Company in New York City.

“These are simply a tax on the transfer of property,” Miller says. “A transfer tax may be levied from a government entity within the United States, including any city, county or state, but most real estate transfer taxes are generated by local governments.”

How they differ from other real estate taxes

Real estate transfer taxes are different from property taxes, estate taxes and gift taxes, although it’s easy to confuse them.

• Property taxes: These are a recurring tax imposed on properties as a source of revenue for local governments. Funds from property taxes often go toward public works, like funding schools and roads.
• Estate taxes: This tax is paid when the assets of a deceased party, or the estate, are transferred to their heirs. The assets may (or may not) include real estate.
• Gift taxes: Gift taxes are paid when a gift of any kind of property is given to another without repayment, provided the gift is valued over a certain threshold.

“Gift tax and estate tax are typically imposed on the transfer of property, pursuant to estate planning or upon death in accordance with the will,” says Allen Popowitz, chair of the real estate practice at Brach Eichler law firm in Roseland, New Jersey. “Transfer taxes are imposed on the actual transfer of the real estate, typically between a property owner and a third-party purchaser.”

Put another way, “estate and gift taxes are technically transfer taxes, but with different limitations and charges — and unlike real estate transfer taxes, they are paid to the IRS,” says Tania Bartolini, a real estate attorney based in Fort Lauderdale, Florida.

How much are transfer taxes?

The cost of real estate transfer tax is based on the sale price of the property being transferred, and the rate differs from state to state. The range can vary quite widely: A $500,000 home sale might incur just $50 in transfer taxes in Colorado, where the rate is one cent for every $100 in value. But in Florida, where the rate in most of the state is much higher at 70 cents per $100, the same sale would run $3,500.

Real estate transfer taxes are considered part of the closing costs in a home sale and thus are due at the closing. Transfer taxes are not tax-deductible against your income tax, but can increase the tax basis of the property for the purchaser, reducing future capital gains taxes.

Who pays for transfer taxes?

In many places, the seller is the one obligated to pay the transfer taxes. But again, the rules vary.

“In some states, like Pennsylvania, this expense is typically split between the buyer and seller,” Popowitz says. “In other states, and depending upon the strength of the real estate market, the tax is sometimes paid by the buyer.”

Like many closing costs, who pays is often open to negotiations: The seller and buyer have the option to negotiate who is responsible for paying real estate transfer taxes and stipulate this in the real estate contract. If you’re not sure who’s paying this charge in your transaction, ask your real estate agent.

Where do the funds go?

The local government that imposes the real estate transfer tax can use the funds collected for any reason or purpose they designate, “from repairing the streets to paying employee salaries,” Miller says. In some states, the entire transfer tax is simply paid to the state and distributed throughout the state’s budget.

States with no real estate transfer tax

Several states do not levy a transfer tax at all. These include:

• Alaska
• Idaho
• Indiana
• Kansas
• Louisiana
• Mississippi
• Missouri
• Montana
• New Mexico
• North Dakota
• Oregon (most counties)
• Texas
• Utah
• Wyoming

Source: PropertyShark