What are Real Estate Transfer Taxes?

The cost of buying or selling a house is quite high. You may have to pay a real estate transfer tax in addition to closing costs, commissions to real estate agents and attorney fees. This tax is levied on the transfer or title of property.

Location-specific rules apply to real estate transfer tax. In some areas, it’s the seller who pays, and in others, it’s the buyer. In some states, there are no transfer taxes. See below what you should know about the real estate transfer taxes and how much they may cost you.

What is the real estate transfer tax?

Real estate transfer taxes, also known as deed stamp taxes or document transfer fees, are a tax or fee that is charged by the state or local government upon transfer of real estate. It’s the fee that is charged by the government when a house is sold to transfer ownership legally. This is usually an “ad valorem” tax. The cost is determined by the value of the property sold.

Transfer taxes apply to any change in ownership of any property requiring a title as specified by a deed, or other legal document.

These taxes are a simple tax on property transfers. A tax on transfer of property can be levied by any government entity in the United States including a city, county, or state. However, most real estate taxes are collected by local governments.

What makes them different from other property taxes

It’s easy for people to confuse real estate transfer taxes with property taxes, gift taxes and estate taxes.

• Property taxes are a tax that is imposed repeatedly on property as a way for local governments to generate revenue. Property taxes are often used to fund public works like schools and roads.
• Estate taxes are paid when assets or estates of deceased parties, such as heirs, are transferred. Real estate may or may not be included in the assets.
• Gift taxes: A gift tax is paid when any property is gifted to someone else without repayment.

Estate and gift taxes are usually imposed upon the transfer of property as part of estate planning, or at death, in accordance with a will. Transfer taxes are levied on the transfer of real estate between the property owner and the third party purchaser.

Estate and gifts taxes are technically transfer taxes but they have different limitations and fees — and unlike real property transfer taxes, these taxes are paid to the IRS.

What is the amount of transfer tax?

Real estate transfer taxes are based on sale prices of properties and vary from one state to another. In Colorado, the tax rate is 1 cent per $100 of value. A $500,000 sale could incur $5000 in taxes. In Florida, however, the tax rate is 70 cents for every $100 of value, which would cost $3,500.

Real estate transfer tax is included in the cost of closing a house sale. It must be paid at closing. Transfer taxes cannot be deducted from your income taxes, but they can increase the property’s tax basis for the buyer, which will reduce future capital gains tax.

Who pays the transfer tax?

In many cases, it is the seller who has to pay transfer taxes. Again, rules can vary.

In some states like Pennsylvania, the expense is usually split between buyer and seller. In some states, depending on the strength of the market for real estate, the tax may be paid by the purchaser.

As with many other closing costs, the decision of who pays real estate transfer tax is usually open to negotiation. The buyer and seller can agree to the payment method and specify this in their real estate contract. Ask your real estate agent if you are unsure who is responsible for this fee.

What happens to the money?

The local government can use the money collected to pay for anything they choose, from repairing streets to paying salaries. In some states, all transfer taxes are paid directly to the state. They then distribute the funds throughout the budget.

States that do not charge a real estate transfer tax

Some states don’t impose any transfer tax. These include:

• Alaska
• Idaho
• Indiana
• Kansas
• Louisiana
• Mississippi
• Missouri
• Montana
• New Mexico
• North Dakota
• Oregon (most counties)
• Texas
• Utah
• Wyoming