What Is A Transfer Tax?

“Nothing is certain except death and taxes.” The “taxes” part of these famous words from America’s founding father Benjamin Franklin ring true, especially when it comes to real estate transactions. If you’re buying or selling a home, you might be responsible for paying what’s called a transfer tax.

Read on to learn what transfer tax is and how it works. We’ll also consider when you’re required to pay a real estate transfer tax and how it’s calculated.

Real Estate Transfer Tax: Defined

A real estate transfer tax is a one-time charge that a state, county or municipality imposes when a property’s title or deed is transferred from one party to another. You might also hear transfer tax referred to as a deed tax, stamp tax, documentary transfer tax, mortgage registration tax or recordation tax.

The transfer tax rate is usually determined on a local level. Then, using property value and type, a transfer tax amount is generated and paid by one or both parties. Transfer taxes typically aren’t tax-deductible from federal or state income taxes. 

How Does Transfer Tax Work?

As we’ve discussed, a transfer tax is one type of property tax you might pay during a real estate transaction. State or local governments impose a transfer tax any time property ownership is transferred.

While the concept of a transfer tax is simple in theory, there are many important details to be aware of when you’re handling a real estate transaction. Let’s dive deeper into how transfer tax works.

How Are Transfer Taxes Determined?

Transfer taxes are determined by several factors, some of which include:

• Property value: How much you pay in transfer taxes will largely depend on the property’s value at the time of transfer. Since the transfer tax is a percentage of this amount, you’ll be taxed more for properties of higher value.
• Local tax rates: Transfer tax rates vary from state to state. Local governments, such as counties or cities, sometimes also set their own tax rates which affects your bottom line for real estate transactions.
• Property type: The type of property you’re buying, selling, or inheriting can also play a role in your transfer tax price. Depending on its unique economic needs, your local government may tax at a higher rate for commercial or industrial properties. 

When Would I Need to Pay Transfer Tax?

Paying a transfer tax is required in any situation where ownership of a real estate property is being transferred from one individual or entity to another. Your state or local government will typically levy a transfer tax for the following real estate transactions:

• Buying or selling a home
• Gifting property
• Inheriting a property
• Moving property into a trust

State Transfer Taxes

The rules of transfer taxes will vary depending on your location. Each state, county and local municipality has the right to impose their own distinct transfer tax rate along with other stipulations. Some states have lower transfer tax rates, while others have no transfer tax at all.

The following states do not impose a transfer tax:

• Alaska
• Arizona
• Idaho
• Indiana
• Louisiana
• Mississippi
• Missouri
• Montana
• New Mexico
• North Dakota
• Texas
• Utah
• Wyoming

Who Pays The Transfer Tax?

In most states, the seller is required to pay the transfer tax on real estate transactions. Other states have both the buyer and the seller split the cost equally. Depending on the real estate market and negotiations, the responsibility could end up falling completely on the buyer.

However, buyers and sellers are usually able to negotiate and reach a legal agreement (as spelled out in the real estate contract) regarding who will pay the transfer tax.

How Is Transfer Tax Calculated?

To calculate how much you owe in transfer tax, you’ll need to know your property’s sale price and the specific tax rate in your area. Then, multiply the sale price by the transfer tax rate to determine your transfer tax.

For example, say your property is being sold for $250,000 with a transfer tax rate of 1%, or 0.01.

Using the formula: (Property sale price) x (Transfer tax rate) = Transfer tax price

$250,000 x 0.01= $2,500

In this example, you would pay $2,500 in transfer tax.

While the example above shows how to calculate using a rather simple tax rate, many states have two different transfer tax rates – one for state and another for county. If you’re not up to crunching the numbers, you can use an online tax calculator to get an idea of how much you’ll pay on transfer taxes. You can also consult with your real estate professional or local tax authority. 

The Bottom Line

Paying taxes on real estate isn't exactly fun. But, knowing what a transfer tax is and how it works can help you budget effectively, speeding up and smoothing out your real estate sale.

Transfer tax rates and rules will vary based on your location. So, before moving forward with a property transfer, make sure to carefully research your local transfer tax rules.