Most buyers and sellers in the housing market anticipate some tax consequences or implications from the purchase or sale of a home. And, it's natural for buyers and sellers to focus on federal tax issues, and particularly how the deal will impact your federal income taxes.
But, it's important to keep in mind that most states impose various taxes on home sales including "transfer and recording taxes." It can come as a surprise to you when you find out at closing that you have to pay these taxes, which can be a significant amount of money.
Not all states have these taxes, and in those that do, not only do the tax rates vary, but the taxes have various names, such as:
- Transfer Tax
- Recording Tax, Deed Recording Tax, Mortgage Recording Tax, or Mortgage Tax
- Documentary Transfer Tax
- Stamp Tax
So, be careful to check the laws in your area to see if a transfer and recording tax will be applied to your transaction, and if so, how much the tax will be. Or, early on in the transaction, ask your real estate or tax attorney who might be helping you during the purchase and sale.
What Is This Tax?
No matter which name it goes by in your area, the tax is essentially one that is assessed or charged against either:
- The property interest that's transferred from seller to buyer, that is, ownership of a home and the real property it sits upon, or
- The document that's used to make the transfer, which typically is a deed or mortgage
Also, regardless of the name, the tax is calculated the same by almost all the states that have them: it's based upon the value of the home, or more precisely, the amount paid for the home. If a mortgage is involved, the tax is based upon the amount of the loan.
The tax rates vary significantly from state to state. For example:
- In California, the tax is assessed on any transfer that has a value of more than $100, and the rate is $.55 for each $500 of value
- In New York, the rate is $2.00 for each $500 on all transfers, and sometimes there are additional taxes applied. New York has a separate mortgage recording tax, with a rate of $.50 per $100 of value
- In Colorado, the tax is on any transfer that has a value of more than $500, and the rate is $.01 for each $100
Normally, the seller pays this tax. But, in some states it's paid by the buyer, and in still other states the tax is split between the buyer and the seller. Of course, the parties can negotiate who will pay the tax and make it part of the sales contract.
Don't confuse these taxes with "recording fees." The tax is based on the value of the property- the amount the buyer paid for the home. Recording fees are usually a flat rate charge for recording a deed or mortgage in the land office. These fees are usually low and based upon the number of pages being recorded. It's common for these fees to be structured something like: $10.00 for the first 2 pages and $5.00 for each additional page.
Who Assesses the Tax?
Generally, transfer and recording taxes are assessed and collected by local government agencies or offices. But some states, like New York, assess and collect it at the state level. And, in some states, two government levels will assess separate taxes, like a county and a city, on the same property and transaction.
For example, in California, it is common for both a city and county to impose transfer taxes on real estate sales. However, the rate of the city tax is usually one-half the rate of the county tax.
In New York, cities with populations over 1 million can impose a mortgage recording tax on top of the tax imposed by the state. New York City can impose a separate transfer tax on transfers valued at more than $25,000. The rates on this particular tax increase as the value of the property transferred increases.
Finally, some states have a special tax for luxury homes. Again, in New York, for example, 1% is added to the transfer tax if the buyer pays $1 million or more for the home. It's commonly known as the "mansion tax," and it's usually paid by the buyer, not the seller.
Unlike property taxes, you can't take a deduction on your federal income taxes for transfer taxes you pay. However, for the seller who pays the tax, they are considered expenses on the sale and so the payment reduces the amount you realize on the sale, which impacts how much gain (or loss) you have. If you're the buyer and you pay the tax, then you can add the amount paid to your "cost basis" in the property, which also impacts whether you'll have a gain or loss if you sell the property in the future.
Questions for Your Attorney
- I can just add the amount of transfer tax to the sales price of my home, right?
- Can I deduct transfer and recording taxes that I pay on my state and local income tax returns?
- I'm asking $1.5 million for my New York home. A buyer has offered $1.2 million. To avoid extra transfer taxes, he wants me to sign contract selling it to him for $995,000, and he's willing to sign a separate contract promising to pay me $700,000 after closing. This isn't legal, is it?
- What happens if I refuse to pay the transfer and recording taxes?