If you’re a homeowner planning to move into a new home, and therefore selling your old one, it’s important to note that your sale isn’t necessarily over once paperwork has been signed. Specifically, one additional area you may have to cover is the realm of transfer taxes, which are included in closing paperwork and have to be handled before the sale can become final.
At Altius Mortgage and our partners with Mortgage Ogden, our quality loan officers are here to walk you through the entire process — we’ll assist you not only with securing a loan and purchasing your new home, but also with important details on closing out prior home sales. Whether you’re the buyer or the seller in a given home sale situation, what are transfer taxes, what do they cover, and which exemptions might a given seller be eligible for in this area? Here’s a basic primer.
Transfer Tax Basics
Transfer taxes in a home sale situation refer to taxes that are collected by the local city or county when the property is bought or sold. This tax becomes active when the exchange becomes public record.
These taxes will also be called documentary transfer taxes or excise taxes, and they’re collected from the purchaser by the local government. The amount is paid at closing, and it can be paid out of both parties’ funds — for example, if your buyer had part of their savings go towards meeting this requirement, you as the seller benefit by not having to pay extra on top of your own closing costs.
Transfer taxes also apply to estate and gift taxes, as well. This means that if you’re purchasing a loved one’s estate after they’ve passed away, or even in many cases where you’re inheriting such a property, these taxes will apply.
Who Pays Transfer Taxes?
In the vast majority of cases, sellers pay transfer taxes. There are some common exceptions where this rule doesn’t apply — for example, if you’re purchasing a home with the help of your parents (or other family members), and they’re making up at least half of the sales price, then transfer taxes can be paid out of their funds.
The rules here vary from state to state; your best bet is to double-check your state’s laws and regulations on the matter, which you can typically do via a quick online search. In practice, while each local government has its own set of rules, the majority of states follow this general principle: If a husband and wife are buying or selling something together (or through an LLC with a name matching both of their last names), they’re usually able to avoid transfer taxes by one partner covering the cost from their own resources.
How Transfer Taxes Are Calculated
Generally, there are two formats for how transfer taxes may be calculated during a sale:
- Percentage of the sale: This is a common arrangement, and it means that the total transfer tax rate imposed on a given property will be calculated according to a set percentage of the sale price. This percentage will vary from one region to another — in some areas, it may be as low as 1%, while in others, such as New York City’s five boroughs, it can be as high as 4%.
- In increments: In other cases, you will have to pay a set amount of transfer tax per every thousand dollars the sale price of your property exceeds a certain minimum threshold.
In some states, transfer taxes will be even higher if your property is being sold for a large number, usually $1 million or more.
Transfer Tax Exemptions
Now, there may be some cases where sellers are exempt from transfer taxes. These include:
- Gifts: Legitimate, good-faith gifts where the buyers purchase the property with no defects and pay full value.
- Full value lien: If the amount owed on a lien is more than the value of the property, it will be exempt from transfer taxes.
- Agent to the principal: If a buyer or grantee uses their own funds rather than a mortgage loan to purchase a property, it will be exempt from transfer taxes.
- Inherited property: If a buyer inherits a property from a deceased relative, they won’t have to pay these fees.
- Certain commercial leases: Certain commercial property leases — those over a year but under 35 years in length — will be exempt from transfer taxes.
- Debt collateral: In some cases, sellers will transfer a property as a debt collateral, which may allow them to avoid transfer taxes.
- Government agency: In cases like foreclosure or others where government agencies receive the title of the home, transfer taxes are waived.
Are Transfer Taxes Tax Deductible?
Because they are used to legally transfer a real estate title, the answer here is no — transfer taxes are not tax deductible. There is but a single exception here: If the property is purely a work expense, it will generally allow transfer taxes to be deducted at the end of the year. For the record, this does apply to rental and investment properties, so those in these situations must take care to properly deduct from their taxes each year.
In some cases, sellers will add transfer taxes to the cost basis of their property, which is used to calculate your profit or loss upon sale. This is usually done when you are selling or transferring your property to another person or business, especially if the total value of the sale, minus any fees and other deductions, are taxed as capital gains.
For more on transfer taxes when selling or buying a home, or to learn about any of our mortgage rates or other services in the real estate market, speak to the pros at Altius Mortgage today.