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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; in others, transfer taxes aren’t levied at all.
Here’s what you need to know about real estate transfer taxes, how much you may be liable for, where the money goes and whether the cost is tax-deductible.
What are real estate transfer taxes?
A real estate transfer tax, sometimes called a deed transfer tax, is a one-time tax or fee imposed by a state or local jurisdiction upon the transfer of real property. Usually, this is an “ad valorem” tax, meaning the cost is based on the price of the property transferred to the new owner.
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, for one, are imposed on properties as a source of revenue for local governments, and are a recurring tax.
Estate taxes are paid when the assets of a deceased party, or the estate, are transferred to their heirs. Estate taxes are levied at the federal level if the estate is valued at over $11.58 million (as of 2020), and also at some state levels as an inheritance tax.
Gift taxes, on the other hand, 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,” explains Allen Popowitz, chair of the real estate practice at Brach Eichler, a 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 real estate transfer taxes?
The cost of the real estate transfer tax differs from state to state, with the amount based on the price of the property being transferred.
“They can be as low as a flat rate of $2, as it is charged in Arizona, or a percentage of the sales price that can exceed 2 percent,” according to Paul Joseph, a CPA and attorney in Williamston, Michigan.
Consider what you’ll pay in these different states based on a $500,000 home sale, Bartolini says:
- Colorado – $50
- North Carolina – $1,000
- New York – $2,000
- Florida – $3,500
Real estate transfer taxes are considered part of the closing costs in a home sale and 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 real estate transfer taxes?
In many places, the seller is the one obligated to pay the transfer taxes, but 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.”
Of course, 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.
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 taxes
While many states levy a real estate transfer tax when a property title changes hands, several currently do not:
- New Mexico
- North Dakota
- Oregon (most counties)
At the county level, California has what’s known as a “documentary transfer tax” on property transfers. Typically, this equates to $1.10 per $1,000 of the sale price throughout the state, although that amount can vary based on location.