There are a lot of individual expenses wrapped up in closing costs when you buy or sell a home, but the real estate transfer tax is probably one of the least well-known. This is a tax on the transfer of a property’s ownership from one person to another, and it may be levied by the state or local government (or sometimes both).
Whether you are buying or selling a house, it’s essential to understand what to expect from the transfer tax on real estate. Here’s what you need to know.
What is a transfer tax in real estate?
When property ownership is transferred from one person to another, many state and local governments impose a tax on transferring ownership. When this occurs through the process of selling a house, this is specifically described as a “real estate transfer tax.” You may also see a real estate transfer tax referred to as a conveyance, deed stamp, or recordation tax.
Note: The term “transfer tax” can also refer to the tax on the transfer of inherited property after the previous owner’s death. This kind of transfer tax may be called an estate tax if paid by the deceased’s estate or an inheritance tax if paid by the heir.
Where real estate transfer taxes are levied
Real estate transfer taxes may be levied on your home purchase by the state government or the local county, city, or municipality government.
According to , 15 states do not impose real estate transfer taxes. These include:
But just because the state-level government in these states does not impose a transfer tax on real estate doesn’t necessarily mean you’re off the hook for this tax. A local government within one of these states may still tax real estate transfers, such as Washington County, Ore.
In addition, if you do live in one of the many states with a real estate transfer tax, you may pay both a state and local transfer tax. For example, both the state of Illinois and Lake County, Ill., levy a real estate transfer tax. That means either the buyer or seller of a home anywhere in Lake County will pay both state and county transfer taxes. (In Lake County, you can negotiate over which party is responsible for paying this tax.)
The cost of real estate transfer taxes
The exact amount levied for real estate transfer taxes will depend on the property location. Governments that impose transfer taxes set the rate as a percentage of either the property’s assessed value or the sales price. Most areas set the rate at less than 1% of the assessed value or selling price, although some jurisdictions impose higher taxes on higher-value homes, known as a
If you live in an area with both a state and local transfer tax requirement, there will be two tax assessments based on each jurisdiction’s transfer tax rate.
The costs can also vary widely depending on where you live. For example, for people paying both state and county transfer taxes in Lake County, Ill., the state tax is $0.50 per $500, and the county tax is $0.25 per $500. On a $300,000 mortgage, this would come to $450 in transfer taxes ($300 in state taxes + $150 in county taxes = $450).
On the other hand, Colorado’s real estate transfer tax is set at $0.10 per $1,000 of assessed value (0.01% of the value). A $300,000 home sold in Colorado would only require a total transfer tax of $30 (0.01% of $300,000 = $30).
Responsibility for paying transfer taxes
The person responsible for paying transfer taxes varies depending on where you live. The seller is responsible for the transfer tax in some states and jurisdictions. In others, the buyer pays this tax. And there are some areas where this cost is split between the buyer and seller.
Since real estate transfer taxes are part of the closing costs of purchasing a home, it’s also possible for the buyer and seller to negotiate with each other to determine who is responsible for this tax.
Your can help you understand whether you will be required to pay transfer taxes and the amount you might expect to pay. Having this conversation with your agent early in the home-buying process can help you budget appropriately.
Frequently asked questions
Can you deduct real estate transfer tax from your income?
Unlike , real estate transfer taxes are not deductible from your income. However, if you’re a buyer in charge of this cost, transfer taxes will increase the cost basis of the purchase, which could mean you end up paying less in taxes later if you sell the property for a substantial gain. For sellers who pay transfer taxes, the amount you pay reduces the realized gain if you sell the property for substantially more than you bought it.
How would you calculate the real estate transfer tax?
The exact amount owed for the real estate transfer tax depends on where the property is located. For example, Wisconsin levies 0.30% of the home’s assessed value, which comes to $3 per $1,000.
Who typically pays the real estate transfer tax?
It depends on location. In some states and municipalities, the seller is responsible for paying the real estate transfer tax, while others expect the buyer to pay this tax. There are some areas where it is typical for the buyer and seller to split this cost.