The Dallas Morning News
Don’t forget about those real estate transfer taxes
It’s a golden age for homesellers, who continue to command record high prices for their properties from buyers.
But one slight drawback to a higher sales price is that you’ll likely pay more taxes in the form of real estate transfer taxes imposed by your state, county and/or local municipality when title to your real estate is transferred to the new owner.
“A majority of states and the District of Columbia charge a transfer tax, sometimes referred to as a deed tax or documentary fee in connection with the sale of residential property,” Daniel A. Kaskel, a real estate attorney in Boca Raton, Florida, said. “Depending on the jurisdiction, transfer taxes are paid to the city, municipality and/or county in which the property is located. Although collected at the local level, these taxes are often shared, in part, with state and local bodies, including school boards.”
The real estate transfer tax is an ad valorem tax, meaning that it is calculated as a percentage of the sales price.
“In Illinois, for instance, the state will collect a transfer tax from the seller that is equal to $0.50 for every $500 of the sales price. So, if the home is sold in Illinois for $500,000, the state will collect $500 in transfer tax. On that same deal, the county where the real estate is located will also collect a transfer tax of $0.25 per $500 from the seller. Some municipalities and villages in Illinois also collect a transfer tax, the amount of which is determined by them,” explained Mario Iveljic, a licensed real estate agent and attorney in Chicago.
Transfer tax costs vary widely from state to state. Colorado and Alabama charge among the lowest while Delaware remains the highest (4%). Some states, including Alaska, Indiana, Texas and Wyoming, have no real estate transfer taxes, per Kaskel.
Most real estate contracts stipulate that the seller pays the transfer tax. But in some areas, both the seller and the buyer are responsible for paying transfer taxes. These parties can ultimately negotiate who pays what in their transaction.
“It’s particularly important for buyers to understand real estate transfer taxes in case they have to pay them so that they have a better idea of how much money they’ll need out of pocket to buy the house,” suggested Roderigo Gonzales, a real estate investor in San Antonio.
Understanding transfer tax is smart, as it can be used as a negotiation tool by the buyer.
“After commissions, transfer taxes are often one of the highest fees paid in connection with the closing,” Kaskel pointed out. “The buyer can offer to absorb the seller’s portion of the transfer tax in exchange for a reduced purchase price, for example.”
Transfer taxes are usually paid at closing and are a one-time payment. These taxes are deducted from the closing proceeds and remitted by the closing agent to the taxing authority.
Depending on the state, “required taxes must be paid by someone for the deed to be issued and recorded unless the transaction falls under an exception to the rules requiring a transfer tax,” Iveljic adds. “Typically, the attorneys for the buyer and seller confirm the amount of the transfer taxes, and those amounts are reflected on the closing statement. The title company then ensures the recorder of deeds is paid the state and county transfer taxes.”
Sometimes a municipality will obligate that the buyer or seller pays the transfer tax before the closing date. If/when this occurs, the seller or buyer must go visit their local village hall, pay the transfer tax and ultimately receive a transfer stamp, which will need to be given to the title company so they can be affixed to the deed to be recorded.
“Once your deed is recorded, it will show the amount of the state and county taxes paid and it may also show the state and county tax stamp numbers,” continued Iveljic. “If a municipality transfer tax is also paid, the deed will show the city stamp number and the amount of the city tax that was paid. And if an actual transfer stamp was required, the stamp will be affixed to the deed itself. These are all evidence showing what taxes were paid.”