5 Things You Need to Know About Transfer Taxes

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Published on March 8, 2018

Selling your home can be such a joy and sometimes even a relief. However, the process isn't over when the buyer signs on the dotted line. The transfer taxes still must be processed. Taxes have a way of making people's heads spin. Looking at the closing paperwork may leave you with more questions than answers. But, what are transfer taxes? What role do they play in the closing process?

What are transfer taxes?

Transfer taxes are taxes collected by the city or county when a property is purchased or sold. The tax is added when the exchange becomes public record. Transfer taxes are also called documentary transfer taxes or excise taxes. They also apply to estate and gift taxes too so keep that in mind when processing the estate of a loved one who has passed.

How much are transfer taxes?

That depends on the county and sale of the house. It's not the same for everyone. You will want to ask your real estate agent what the tax amount is. It could be a percentage of the sale or it could be calculated in increments. If it is calculated in increments it may be something like $2 for every $500 chunk. If you sold the property for $250,000 you would divide 250,000 by $500 which is 500. $500 *2 is $1000 and that would be what you owe in transfer taxes for the sale. Some states will add an additional transfer tax if you sell a property for $1,000,000 or more. It is referred to as the 'mansion tax' and it is typically one percent of the sale price.

Transfer tax exemptions:

Transfer tax exemptions are not common, but they do occur.

Gift - This must be a bona fide legitimate gift. The buyers purchase the place in good faith that there are no defects and pay the full value of the property.

It is worth $100 or less - If the fair market value of the property is $100 or less it is exempt from being charged transfer taxes.

Full value lien - If the amount owed on the lien is more than the value of the property than it is transfer tax exempt. This would happen if the mortgage is upside down or has negative equity.

Agent to the principal - If the buyer or grantee uses their own funds to purchase the property then there is an exemption. Sometimes quit claim deeds fall into this category. Quitclaim deeds are when property simply changes ownership. They offer minimal protection and are most often used between family or very close friends. Unlike traditional deeds, there is no title search or title insurance taken out. If you have two deeds being recorded concurrently you can claim this exemption.

Lease of fewer than 35 years - There are instances where you can sign long term-leases for years at a time instead of the standard twelve-month lease. This occurs with commercial leases more so than with residential leases. However, if the property is leased for over 35 years the transfer tax applies.

Debt collateral - This isn't valid on deeds, but you can transfer a property as a debt collateral and avoid transfer taxes.

A government agency receives the title - This would happen in a foreclosure if the bank did not receive the property. If the beneficiary is the federal home loan mortgage corporation (FHLMC) or the federal national mortgage association (FNMA) than transfer taxes are waived.

Are transfer taxes tax deductible?

No, transfer taxes are not tax deductible since they are a charge to legally transfer a real estate title. Like many things, there is one exception to this rule. If the property is a work expense, then transfer taxes are deductible. This would apply to investment or rental properties. One thing you can do is add the transfer taxes to the cost basis of your property. This cost basis is used to calculate your gain on the property. An increased cost basis decreases the total gain of the home. Thus, you pay fewer taxes on the gain.

Who pays transfer taxes?

Typically, transfer taxes are paid by the seller. However, depending on your county that may not be the case. There are a few exemptions in about one percent of all sales.

Like many things involving the IRS, transfer taxes are a lot to take in and vary depending on the state. They are a part of real estate. But, they should not take away from the joy (or relief) that can come from selling your home. Your real estate agent will be happy to walk you through the process to help provide a smooth sale.