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When you buy or sell a house, you must pay a transfer tax as a percentage of the sale amount. Depending on your address, it's possible to encounter transfer taxes at the city, county and state level. You may also run into federal transfer taxes on property obtained as a gift or inheritance. The transfer taxes involved in such cases are more commonly known as the estate tax and gift tax.
- What is a Transfer Tax?
- Who Pays Transfer Taxes: Buyer or Seller?
- How Do You Calculate Transfer Tax?
- Are Transfer Taxes Deductible?
What is a Transfer Tax?
A transfer tax is the city, county or state's tax on any change in ownership of real estate. Your transfer tax is equal to a percentage of the sale price or appraised value of the real estate that you buy or sell. In some states, the transfer tax is known by other names, including "deed tax", "mortgage registry tax" or "stamp tax". Some counties in the US levy what is known as an "optional" transfer tax. Despite the name, it's the county government that decides whether or not to charge optional transfer taxes.
Transfer taxes are separate from recording fees and mortgage recording taxes, which apply on top of transfer taxes. Not all states or counties charge both sets of taxes, but many high-cost areas like New York City levy both together. A recording fee is normally a small flat amount while mortgage recording taxes are a percentage of the sale price, like transfer taxes. Taken together, all these fees can end up constituting a significant chunk of your mortgage closing costs.
Keep in mind that transfer taxes also differ from capital gains taxes, which may be levied if you've lived in your home for less than two years.
Who Pays Transfer Taxes: Buyer or Seller?
Depending on the location of the property, the transfer tax can be paid either by the buyer or seller. The two parties must determine which side will cover the cost of the transfer tax as part of the negotiation around the sale. Ultimately, the decision can be influenced by local custom as well as the real estate market. For instance, it might be common practice in one state for the buyer to pay the transfer tax, while in other states the tax is shared or paid by whichever side has less bargaining power. In a few places, each party pays its own set of transfer taxes.
How Do You Calculate Transfer Tax?
Transfer tax is assessed as a percentage of either the sale price or the fair market value of the property that's changing hands. State laws usually describe transfer tax as a set rate for every $500 of the property value. For instance, the transfer tax in North Carolina is described as $1.00 for every $500, a rate of 0.2%. You may be responsible for transfer taxes at multiple levels of government depending on where the property is located. We've provided some examples of transfer taxes for some of the most heavily populated states in the U.S.
Real Estate Transfer Taxes in Five States
Tax per $100,000 of Property Value
Transfer tax rules and rates vary widely by state. Some, like Texas, have no transfer tax at all. Others charge different rates for different levels of property value. One of the more complicated examples can be found in New York, which imposes a 1% increase in transfer tax on property values over $1 million. On top of that, New York City charges different rates based on your property type and whether the value is over or under $500,000.
If your state isn't listed above, you can get an idea of how much you'd owe by consulting this list of transfer tax rates.
Calculating Estate Tax and Gift Tax
If you're receiving real estate as a gift or an inheritance, the gift tax and estate tax apply instead of regular transfer taxes. These taxes are both collected by the federal government. Unless the property is worth more than $5.49 million, you shouldn't have to worry about paying estate tax or gift tax on the transfer. They only apply when the gross value of all a deceased person's assets and the gifts he's given over the course of his life add up to more than $5.49 million (as of 2017).
In practice, this means that most people won't have to worry about paying either an estate tax or a gift tax. However, you may be liable for these taxes on a house worth less than the limit if the combined value of all the original owner's assets—including not only the house but also hard cash and investments—exceeds $5.49 million. If the value of your inherited property sends the total value of assets over the limit, the estate tax is calculated as a percentage of the property's appraised value at the time of the original owner's death.
If the property's value has decreased since the death of the giver, you can also choose to base your estate tax on the value as of six months after death. However, this later valuation must be applied to all assets in the entire estate, not just the home. If you sell your inherited real estate during the six month period, the estate tax will be calculated from the final sales price rather than from a separate appraisal.
Are Transfer Taxes Deductible?
Whether you buy or sell, the IRS doesn't allow you to deduct transfer taxes—or any other taxes involved in the sale of a personal home. This includes other costs like the recording tax paid on each mortgage. However, transfer taxes in some areas are "deductible" from one another: the tax you pay to one level of government may reduce the tax you owe to another. For instance, the state of California counts transfer taxes that you pay to your county as credit against your state tax, resulting in a lower total tax rate.