What Is a Transfer Tax in Real Estate? How Does It Work?

Buying or selling a home involves many expenses. Besides closing costs and real estate agent commissions, you might also need to pay a real estate transfer tax. And, if you want to navigate the buying or selling process more smoothly and avoid any surprises, you need to understand what is a transfer tax in real estate, who’s responsible for paying it, when, and how.

To give you a quick update, this tax is levied by the government on the transfer of a property’s title or deed. Moreover, the amount you pay depends on how much the property is worth and what kind of property it is. Therefore, it’s important to know exactly what is a transfer tax in real estate and its rules.

What is a transfer tax in real estate?

A transfer tax is a type of fee on the transfer of property ownership from one party to another. This tax is imposed by the state, county, or municipal authorities when a property is sold and its legal title is transferred from the seller to the buyer. The tax amount is based on the property’s value and classification.

Interestingly, a deed transfer tax typically cannot be deducted from federal or state income taxes. However, it can be added to the cost basis of securities and investment property. And, can affect the calculation of profit when these assets are sold. In some states, a transfer tax is classified as an excise tax. This means it is a tax on the transaction rather than the real property or income.

Usually, the home seller is responsible for paying the transfer tax. But sometimes, the buyer may agree to pay it instead.

How much is the transfer tax amount, on average?

Transfer taxes are typically calculated based on the sale price or value of the property being transferred. The tax rate may be a percentage of the sale price or a fixed amount per certain value increments. These rates differ across states. For example, in Colorado, the rate is one cent for every $100 in value, resulting in lower transfer taxes. Conversely, in Florida, the rate is much higher, typically 70 cents per $100.

These taxes are generally paid at closing and are not deductible against income tax. However, they can increase the tax basis of the property for the purchaser, potentially reducing future capital gains taxes.

Who is responsible for paying transfer tax in the United States?

Who pays for transfer taxes can vary depending on the location and negotiation between the buyer and seller. Typically, the home seller is responsible for paying transfer taxes in many places. however, this isn’t always the case. For instance, in some states, such as Pennsylvania, the fee may be split between the buyer and seller. In other states, especially in robust real estate markets, the buyer might pay the tax.

This payment arrangement is often negotiable based on ownership interests, and both parties can discuss and agree on who will cover the transfer taxes as part of the real estate contract. If you’re unsure who’s responsible for this fee in your transaction, it’s best to consult your real estate agent for clarification.

How is transfer tax different from other real estate taxes?

Transfer taxes, property taxes, estate taxes, and gift taxes all involve property and asset transfers, but they differ in their specific uses.

Transfer taxes are one-time fees paid when property ownership changes hands, typically during a sale. The amount is based on the property’s sale price. And either the buyer, seller, or both may pay it, depending on the location.

Property taxes, on the other hand, are annual taxes paid by property owners based on the property’s assessed value. These taxes help to fund local services such as schools and infrastructure.

Estate taxes are levied on a deceased person’s total estate value before it’s distributed to heirs. The estate itself pays this tax, which is based on the net value of all assets minus debts. This tax aims to tax the transfer of wealth from the deceased to their heirs.

Gift taxes apply when someone gives a significant gift exceeding the IRS annual exclusion limit. The gift tax is imposed to prevent individuals from avoiding estate taxes by transferring substantial wealth to their heirs before they die.

Key takeaway

Real estate transfer taxes are one-time fees charged by state or local governments. They occur whenever there is a transfer of ownership from one party to another. The amount of these taxes depends on the property’s sale price and varies by location, reflecting different regional tax rates and regulations.

Keep in mind that these taxes can add a notable expense to the transaction. Therefore, buyers and sellers need to understand exactly what is a transfer tax in real estate, who is liable for the payment in their specific area, and how it affects the overall financial arrangement.

FAQs

Are transfer taxes deductible?

Transfer taxes are usually not deductible from federal or state income taxes. However, they may be added to the cost basis of the property. And, potentially reduce future capital gains taxes for the buyer.

Which U.S. states do not have transfer tax?

Some states do not impose a real estate transfer tax. These include Alaska, Arizona, Idaho, Indiana, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Texas, Utah, and Wyoming.

Is the transfer tax negotiable?

Yes, the payment of transfer taxes is often negotiable between the buyer and seller during the real estate transaction. The terms of who pays the transfer tax can be specified in the purchase agreement or contract. In some cases, transfer taxes may be waived or reduced for certain types of transactions, such as transfers between family members or transfers for affordable housing purposes. However, eligibility for waivers or reductions depends on local laws and regulations.

Can transfer taxes be financed as part of the mortgage?

In some cases, transfer taxes may be included in the mortgage loan amount and financed over the term of the loan. However, this depends on the lender’s policies and the borrower’s financial qualifications.

How can I find out the transfer tax rate in my area?

You can typically find information about transfer tax rates on the website of your state or local government’s department of revenue and taxation. Your real estate attorney or agent can also guide you on transfer tax rates in your area.

Written by Ramona Sinha. May 29, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.