Are there any exceptions to paying transfer taxes?
There are, although you should check with your real estate agent, a real estate attorney, or a tax professional for specifics related to where you live.
Let’s look at California again as an example. Because California specifies that the sale has to be a “conveyance for value,” any property that doesn’t meet that definition isn’t charged transfer tax, Wasserman says.
So if property changes owners during a marital dissolution, there’s no transfer tax, he says. Property secured as part of a debt or foreclosure? No transfer tax.
Property transferred into a trust? No transfer tax. Other situations where the transfer tax doesn’t apply can include property that spouses own at a 50-50 split that they want to transfer into an LLC. “The proportional interest remains the same,” Wasserman says.
Property given as a gift in California also is not subject to transfer tax, he says.
However, some states, such as Iowa, Nebraska, New Jersey, or Pennsylvania, will impose estate or inheritance taxes. In contrast, Maryland enforces both estate and inheritance taxes, necessitating fees from both the recipient and the deceased’s estate, as highlighted by the Tax Foundation. Therefore, it’s important to consult with a local expert about your tax laws.
So, a real estate transfer tax is just a processing fee?
In some areas, real estate transfer tax is considered a fee for processing the transfer paperwork, even though “you don’t need to pay $1,000 or $2,000 to put a stamp on the property,” Fallico says. “It’s what you do for closing. It’s what you pay, just like you pay interest on a loan.”
Some municipalities require a “point of sale” or occupancy inspection in addition to the home inspection, so the payer feels like they’re receiving something in exchange for the tax, Fallico says. “An inspector comes out and looks at the electrical, looks at the plumbing, makes sure that you didn’t do additions to the property and are paying your fair share of taxes.”
However, some municipalities also add on processing fees. In Santa Monica, the county recorder’s office charges a recording fee of about $28 for the first page and roughly $7 per page thereafter, Wasserman says.
The District of Columbia has a deed recordation tax of 1.45% or 1.1% for values up to $400,000, as well as a deed transfer tax of the same amount.
Are transfer taxes tax-deductible?
Unlike property taxes, which you can deduct up to $10,000, you cannot deduct transfer taxes or stamp taxes on the sale of a personal home, according to the Internal Revenue Service. If you’re a buyer and pay them, they’re included in the cost basis of the property. If you’re the seller and pay them, they’re expenses of the sale and “reduce the amount realized on the sale,” the IRS says.
Criticisms of the transfer tax
The National Association of Realtors (NAR) historically has opposed real estate transfer taxes, calling them a “major burden to buyers and sellers.”
The NAR says these taxes are “volatile” in nature, making them a poor revenue source for municipalities. The association also says real estate transfer taxes reduce housing opportunities overall and place an added burden on low-income families and those who move often.
NAR has proposed exempting first-time homebuyers and those from low- and moderate-income households from transfer taxes.
New Jersey has reduced transfer tax rates for sellers of low- and moderate-income housing who are senior citizens, blind or have disabilities. This reduced rate ranges from 50 cents to $3.40 per $500, MidPoint says.
The District of Columbia reduces its deed recordation tax for first-time homebuyers to 0.725% for values up to $400,000; they still must pay a deed transfer tax of 1.45% or 1.1% for values up to $400,000.
Real estate transfer taxes are but one slice of the fees and costs associated with selling your home from start to finish. (HomeLight has a handy Net Proceeds Calculator that breaks down all these fees, so you can estimate your final payout.)
Talk with your real estate agent, a tax professional, or an attorney about any exemptions to transfer taxes relevant to your situation, so they can answer all your questions before it’s time to sign on the dotted line.
Header Image Source: (Karolina Grabowska / Pexels)
All product names, logos, and brands are the property of their respective owners. All company, product, and service names used in this website are for identification purposes only. Use of these names, logos, and brands does not imply endorsement or any affiliation with HomeLight.
