If you are looking to buy or sell a home, you know that the purchase price is only part of the story. There are many other costs associated with the transfer, including the costs of real estate attorneys, brokers, title insurance, inspections, and lender fees.
Transfer taxes are another significant element to consider. The transfer of a home has federal, state, and local tax consequences (sometimes referred to as “recording taxes”) for both the buyer and the seller. Being aware of these expenses ahead of time will prevent surprises at the time of closing.
Types of Transfer Taxes
Many different types of taxes might apply to your home sale. The term “transfer taxes” is useful, since it captures the wide range of fees you may need to pay to the federal, state, or local government as a result of the real estate transaction.
Federal Capital Gains Taxes
While not technically a "transfer tax," it is crucial for home sellers to understand the effect of a home transfer on your annual federal taxes. The Internal Revenue Service provides a helpful document known as Publication 523, which is a detailed guide to understanding the federal tax implications of a profitable home sale.
Although there are many complexities, the general rule to keep in mind is that, if the sale of your home produces a taxable gain, you may be able to shelter up to $250,000 of that amount from federal taxes if you are single and up to $500,000 if you are married and filing a joint return. Read more about the federal tax ramifications of a home sale in Nolo’s Avoiding Capital Gains Tax When Selling Your Home.
State and Local Real Estate Transfer Taxes
At the state and local level, home buyers and sellers can expect to pay a variety of other taxes and fees. Not all states and localities have them, and they tend to vary drastically from one county to the next.
Transfer taxes are generally assessed by the state, and done at a percentage of the dollars of the total transaction. Recording taxes (sometimes called deed recording taxes) and mortgage recording taxes involve fees, usually to the local recorder or county clerk, involving the charge for documenting your deed, i.e. filing the updated deed with the new buyer’s name.
The home buyer and seller can negotiate over who will pay the taxes and make it part of the sales contract. Indeed, sometimes both the buyer and seller can ask their respective attorneys to work together to determine a solid solution.
What Determines the Amount of Your Transfer Taxes?
As you can see, how much you can expect to pay in home transfer tax varies dramatically based on your state and locality. For example, homes in areas with strong school districts tend to pay much higher local taxes on real estate transfers than those without such strong schools. Also, regardless of the name, the tax is calculated similarly 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 typically based upon the amount of the loan. Common sense dictates that if you’re buying a huge home with a large loan, you can probably expect to pay more in taxes than you would pay for a small studio apartment in a condominium in a suburban area.
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
The National Conference of State Legislatures has a convenient chart with information about real estate transfer taxes in each state.
Who Assesses the State or Local Tax?
Generally, state governments assess transfer taxes, and local government agencies or offices assess recording taxes. But some states, like New York, assess and collect this tax 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.
Finally, some states have a special tax for luxury homes. 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.
Can You Deduct Your Real Estate Transfer Tax Payment?
Unlike with 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 realized on the sale, which impacts how much gain (or loss) the seller has.
If you’re the buyer and you pay the tax, 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 and when you sell the property in the future.
Choosing the right real estate lawyer is important, since many of these tax issues can be complex. Indeed, whether you are a buyer or a seller, you may want to consult a personal accountant as well as an attorney to advise you on the broader implications of the real estate transfer.
Questions for Your Attorney or Accountant
- Can I simply add the amount of transfer tax to the sales price of my home?
- 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 a 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?
- Is there any way to minimize my tax burden?