Finance
How Are Transfer Taxes Biting You In CRE?
Get a clear explanation of transfer tax, detailing its implications, calculation methods, and relevance in real estate transactions with our guide. Essential for individuals navigating the buying or selling process, seeking to understand the financial and legal aspects of transfer taxes.
There are all sorts of costs associated with buying and selling real estate. One of the most common is a transfer tax, which is a tax that is imposed by a government whenever valuable items exchange hands. These taxes can be applied to a wide range of things from family inheritances to real property.
Transfer taxes are part of the closing costs that are paid to acquire a property. They can range anywhere from 0.01% to 5% of a property’s purchase price, and the rules associated with these taxes vary from state to state. Some states like Alaska, Idaho, and Indiana do not charge transfer taxes at all, so buyers will want to focus on other negotiated terms of the transaction. Because these costs can often be paid by either the buyer or seller, depending on state law, analysis of the cost of each is something both buyer and seller should perform to determine the level of their concession during negotiations.
Developers and real estate investors need to understand transfer taxes in order to accurately project the amount of profit they can make on a certain deal. This brief guide will teach you all about real estate transfer taxes and give you examples of how they work in practice.
What is real estate transfer tax?
Transfer taxes are a one-time duty that is paid to the government when real property is bought and sold. This tax may also be referred to as a conveyance tax, a realty transfer tax, a documentary stamp tax or a deed transfer tax depending on your location and the kind of transaction. But each name conveys the same meaning.
This tax is often unavoidable and there are a limited number of exemptions that real estate investors and developers can claim to prevent a property from being subject to property taxes. These exceptions are outlined in local or state laws and often apply to properties like churches, charities, or schools.
Here’s a quick example of how transfer taxes work. Hennepin County, Minnesota levies a tax rate of 0.0033 on the transfer or sale of a property through what’s known as a “deed tax.” So, if a property is sold for $200,000, the transfer taxes due on the property would be roughly $680. Local law says that the seller of a property is responsible for paying these taxes at closing.
Who pays transfer tax?
State law determines who is responsible for paying transfer taxes. In states like Colorado, the buyer is responsible for paying transfer taxes while states like Pennsylvania or Georgia require the seller to pay the taxes.
The responsibility for paying transfer taxes is often not set in stone and can be negotiated between the parties. In fact, there are some states where it is more beneficial to negotiate for the other party to pay transfer taxes. For instance, if a state charges state and local transfer taxes and recordation taxes, it’s probably best to negotiate. Here is a list of places where it may be most beneficial to negotiate transfer taxes as well as a more comprehensive breakdown.
| State | Transfer tax type | Who is responsible |
| Connecticut | City conveyance tax State conveyance tax | Seller |
| Delaware | State transfer tax Local transfer tax | Buyer and seller |
| District of Columbia | Transfer tax Recordation tax | Buyer is responsible for transfer tax. Seller is responsible for recordation tax. |
| Illinois | State, county, and municipal transfer taxes | Buyer and seller |
| Maryland | Recordation tax State transfer tax County transfer tax | Buyer and seller |
The amount of transfer taxes that a buyer or seller pays is also determined by local laws and the type of property included in the transaction. For instance, Georgia levies a transfer tax of $0.10 per $100 of a property’s value. So, if your property is worth $100,000, your transfer taxes will be around $1,000.
Are there any exceptions?
There are certain property types that are exempt from paying transfer taxes. These include railroads, churches, schools, charities, and government buildings. But transfers on these properties are not
Jurisdictions can also exempt a deal from transfer taxes for reasons like securing a debt, if a deed is transferred in lieu of foreclosure or if someone owned a property for less than a certain amount of time defined in local ordinances. Chapter 11 bankruptcy proceedings may also protect a property from being subject to transfer taxes in some instances.
What states have no real estate transfer taxes?
There are 13 states with no real estate transfer taxes. They are:
- Alaska
- Idaho
- Indiana
- Kansas
- Louisiana
- Mississippi
- Missouri
- Montana
- New Mexico
- North Dakota
- Texas
- Utah
- Wyoming
