When you buy a house, you have to register the deed to make the transfer of ownership official. In some places, you also need to pay transfer taxes.
A real estate transfer tax is a tax imposed by a state or local government when real property changes hands. It can also be called a deed transfer tax or a real estate excise tax.
Transfer taxes may also refer to estate and inheritance taxes, which may be charged instead if you receive property as an inheritance when someone dies.
State or local laws sometimes specify that the buyer or the seller owes transfer tax after real estate is transferred from one party to another. But if there's no legal requirement for a particular party to pay it, then the buyer and seller can negotiate to decide which of them will cover this cost.
A transfer tax is included in closing costs, and it's due when the buyer and seller close on the sale of a property. If you're taking out a mortgage, any transfer taxes you owe will appear on the second page of your closing disclosure.
A transfer tax return, or transfer tax declaration, is a form that the buyer or seller submits when a property is transferred. States and local governments that assess transfer taxes have their own forms, so the document will look different from one location to another.
Typically, the transfer tax return asks for the name and contact information of the buyer and seller, the property's address and value, the legal description of the property, the date of the transfer, and the amount of tax due. The form might also include fields for inputting information about the sale, such as whether the property was sold at auction. And there might be a space to indicate whether any tax exemptions apply to the transfer.
Transfer taxes vary by state, and some states don't levy transfer taxes at all.
Keep in mind that you might owe a transfer tax to the local government even if your state doesn't impose a deed tax at the state level. For example, while the state of California doesn't assess transfer taxes, California counties do charge taxes on the transfer of deeds.
It's also possible that you'll have to pay transfer taxes to both state and local governments.
The following states do not have transfer tax. Everywhere else, including D.C., does impose transfer taxes.
Most state transfer taxes are assessed as a certain number of cents or dollars per dollar amount of the property's sale price or value. For example, in Kentucky, the tax is $0.50 per $500 of the property's value, plus $0.50 for the amount left over after the value is divided by $500.
In terms of percentages, state transfer taxes are usually in the range from 0.10% to 1.50%. So if you're buying a house for $200,000, the tax bill could be $200 in a state with a transfer tax on the low end, but might be $3,000 in a state with a high rate.
You could be paying a bit more if a local transfer tax and a state transfer tax both apply.
State and local governments often specify some categories of transfers that aren't subject to tax, or that are taxed at a reduced rate. These exemptions differ from one location to another, but an attorney or financial advisor can point you toward the relevant rules.
Examples of transfers that could be exempt include:
Transfer tax is just one of several kinds of tax a property owner may need to pay in the course of buying, owning, or selling real estate. These are the main types of real estate taxes you might encounter:
Local governments levy property taxes by estimating the market value of a property and multiplying that value or a fraction of the value by the tax rate. Unlike transfer taxes, which only apply if a property changes ownership, property taxes are due at regular intervals — usually once a year or once every six months.
If you buy real estate and later sell it at a profit, you might owe capital gains tax to the IRS. Like a transfer tax, capital gains tax applies when property is sold, but only the seller pays this tax and it applies to the profit they earn rather than to the value of the property. Some capital gains generated from selling a primary residence can be excluded from tax in certain circumstances, so capital gains tax is often a bigger deal if you're selling a second home or an investment property.
The federal government and some states impose estate tax. If a person dies and the value of their estate — including real property — is over a certain threshold, then tax might need to be paid from their estate.
A few states levy inheritance taxes. Heirs may owe inheritance tax when property is passed down to them if the value of their inheritance is greater than a set limit.
If you own real estate and collect rent on it, you generally pay income tax to the IRS on that rent. If your adjusted gross income is above a certain level, you may also have to pay Net Investment Income Tax on your rental income to the IRS. In addition, state income tax may apply.
Depending on location, a transfer tax could amount to a small fee or to a larger cost — or this type of tax might not apply at all. So you'll want to find out the specifics for your area before buying or selling a home or property.
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