Whether you’re a savvy real estate investor or a homeowner selling the house you raised your children in, you’re likely counting on the impending sale to generate ample profits. However, although you might have 100% equity or put in the blood, sweat and tears for the necessary renovations, your net gain might be lower than you think because of real estate transfer taxes. Depending on your location, you might be liable to pay well over 1% of the sale price for these taxes. Real property transfer tax (RPTT) is imposed on sales, grants, assignments, transfers or surrenders of real property. RPTT can occur on state and local levels, increasing expenses further. Here’s how it works.
A financial advisor can help optimize your financial plan for taxes on a real estate transfer.
What Are Real Estate Transfer Taxes?
Real estate transfer taxes, also known as deed transfer taxes or property transfer taxes, are fees for when real property (such as land or buildings) changes ownership. These taxes are typically assessed on the sale or transfer of real estate and are usually a percentage of the property’s purchase price or assessed value. This tax is typically the seller’s responsibility, although local regulations vary and may require the buyer and seller to split the cost.
In addition, the rates and regulations surrounding real estate transfer taxes can vary significantly from one location to another. Some jurisdictions may have both state-level and local-level transfer taxes, each with its own rules and rates. There also may be exemptions or reduced rates for specific transfers, such as transfers between family members, with property below a particular value threshold or involving affordable housing initiatives.
How Real Estate Transfer Tax Works
RPTT imposes a charge on the transfer of real estate from one owner to another. They even apply in cases where two owners exchange property. The tax is usually a percentage of the property’s sale price or assessed value. Here’s an example to illustrate how real estate transfer taxes work:
Sometimes, the responsibility for paying the transfer tax is negotiable between the buyer and seller. For instance, the buyer might agree to cover the full tax to make their offer more attractive in a hot market.
Remember, before engaging in a real estate transaction, it’s crucial to research and understand the specific transfer tax laws in your area or consult with a local real estate professional or attorney to ensure compliance with local regulations. For instance, state and local taxes may be due simultaneously on the same transfer, creating a heftier total tax bill.
How Real Estate Transfer Taxes Differ From Other Taxes
Real estate transfer taxes share similarities with other taxes, so homeowners sometimes confuse them with other fees. For instance, property taxes are similar because they also generate income for cities and counties. However, property taxes come every year and can change over time because of new local tax codes and fluctuations in assessed property value. In addition, real estate transfer taxes have distinct rates from property taxes.
Likewise, estate taxes have a nearly identical name. However, these taxes occur when a person passes away and transfers assets (not solely real estate) to their beneficiaries. The federal government charges estate taxes when the estate (again, the person’s collection of assets, not just land or buildings) is worth more than $12.92 million in 2023.
Lastly, gift taxes apply to assets (including real estate) you give to others. They share the same lifetime threshold of $12.92 million as the estate tax limit. However, you can bypass a portion of these taxes through the annual gift exclusion. Specifically, the 2023 gift limit is $17,000, meaning you can give this amount to as many individuals as you want. So, if you have 10 beneficiaries you want to transfer wealth to, you’ll give up to $17,000 x 10 = $170,000 per year without incurring a dime of gift taxes. This tactic helps avoid paying more taxes to the federal government on the wealth you want to pass to your heirs.
Real Estate Transfers Tax Example
Say you’re selling a single-family home in New York City, where both state and local transfer taxes apply. Specifically, the state rates are 0.4% for sales up to $3 million and 0.65% for sales above that amount. On the city level, the charges are 1% for sales below $500,000 and 1.425% for sales over $500,000.
You sell your home for $750,000 and real estate transfer taxes are due. First, you pay the 0.4% state rate: $750,000 x 0.004 = $3,000. In addition, you owe taxes to New York City at the following rate: $750,000 x 0.01425 = $10,687.50. So, your total real estate transfer tax bill is $13,687.50.
Who Pays the Real Estate Transfer Tax?
Sellers usually pay the real estate transfer tax. However, some states and municipalities require buyers and sellers to split the cost. In addition, sellers can negotiate for buyers to cover this expense, which a buyer may agree to in a competitive market to give themselves the edge over other buyers.
State, county and municipal governments impose real estate transfer taxes, although some regions have 0% transfer taxes. Generally, the purpose of real estate transfer taxes is to generate revenue for local governments. This revenue can fund public services, infrastructure projects, schools or other community needs.
States With No Real Estate Transfer Tax
Although real estate transfer taxes are widespread in the United States, some states charge none of this type of tax. While keeping in mind that tax codes can change, here are the states with no real estate transfer tax:
- New Mexico
- North Dakota
- Oregon, with a few exceptions at the county level
Real estate transfer taxes are fees imposed on the transfer of real property when ownership changes hands. They are typically a percentage of the property’s sale price or assessed value. The responsibility for paying this tax is often negotiable between the buyer and seller and local regulations can vary. Because of the complexity and potential for high costs, it’s crucial to research and understand the specific transfer tax laws in your area or consult with a local real estate professional or attorney before engaging in a transaction.
Tips for Real Estate Transfer Taxes
- Selling property involves a massive transaction of cash. Whether you’re grappling with the potential of a high tax bill or aren’t sure of how to reinvest your profits, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Real estate transfer taxes apply if you sell property to a family. However, you can also leave property for your beneficiaries to inherit after you pass away. One way to do this with minimal expenses and roadblocks is by transferring the property into a trust.
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