Net income provides a more accurate account of the financial status. Here’s why.
What is a transfer tax?
Transfer tax refers to taxes paid when the title to a piece of real property changes hands from one owner to another. This tax applies to property that requires a title, and is imposed when the title is transferred to the new owner’s name.
The term transfer tax can be used in various situations:
- It can refer to a tax imposed on the legal transfer of any type of property. For example, the estate tax and gift tax are both types of transfer taxes. The estate tax entails the right to transfer property from the estate to an individual or entity after death.
- The capital gains tax is another example of a transfer tax involving title transfer.
- Transfer tax is most often used in reference to the passing of a real estate title from one person or entity to another.
A transfer tax is generally imposed by states, cities, counties, municipalities or towns for property transfers and transactions that occur within their jurisdiction.
Transfer taxes vary by location, with some states, counties and municipalities charging different amounts and percentages than others. In general, however, a transfer tax is a designated percentage of the total sales price, similar to the sales tax charged at retail stores for items ranging from groceries to big-ticket items like electronics. For example, on deeds, Alabama charges 50 cents for every $500 paid toward the property, or 0.1 percent. There are some exceptions to this rule, however. Arizona instead charges a flat fee of $2 per deed or contract. Percentages vary considerably, and can amount to more than 2 percent in some locales.
The person responsible for paying the transfer tax also varies by location as well as by circumstance. In the state of New York, for example, the seller, typically called the grantor, pays the transfer tax. However, in some cases the seller may be exempt from paying the transfer tax — in which case the buyer, called the grantee, must pay it. In the state of Georgia, the seller is also technically responsible, although the state website notes that often the two parties agree for the buyer to pay it. In Pennsylvania, however, both the buyer and the seller are responsible for the tax — and liable if it’s not paid. In many cases, it comes down to the buyer and seller agreeing on who pays the tax.
Example of transfer tax
The transfer tax must be paid before the transaction is considered complete and the property is transferred to the new owner. Without this tax, the paperwork cannot be filed to finalize the transaction with the recorded deed in the court clerk’s office. In many states, counties and cities, the responsible party can complete the real estate transfer tax declaration document online.
In some cases the transfer tax is not required. In New Hampshire, for example, it’s not required when property changes hands between spouses as part of a divorce decree. It also doesn’t apply to the passing of property to another person because of the death of the previous owner. Consult your local treasury department, department of revenue, or other applicable agency to determine if it’s required in your situation.
Just like closing costs and other fees associated with buying and selling property, the transfer tax is a mandatory part of a real estate transaction. Before you sign any papers or close any deal, determine how much the transfer tax is in your location, and who must pay it. If you don’t plan for this step, you could be caught off guard and without the funds to cover it, potentially stalling a real estate transaction.