A property transfer tax is a tax on the transfer of property. The transfer transaction is similar to a buy/sell transaction in that property changes ownership. There is still a closing, potentially a real estate agent, fees, and the title. But unlike a buy/sell transaction, there are no funds involved to purchase the property.
The main fee involved with a property transfer transaction is the transfer tax. This tax is sometimes referred to as an estate or gift tax. Let’s look at what the transfer tax is and if it is tax deductible.
Can The Property Transfer Tax Be Deducted?
We’ll get right to the point on this question. The bad news is that a property transfer tax is not deductible. However, all is not lost. It can still be rolled into (i.e., added to) the cost basis of the property. The end result is that any gains on the sale of the property may be reduced.
Some states allow you to take a credit on the property transfer tax. For example, a transfer tax paid to the county can be used as a credit against state taxes.
Transfer Taxes Vary From State To State
The property transfer process, fee, and any credits vary from state to state. The process can be easy and inexpensive in some states and difficult and costly in others. Indiana doesn’t charge anything to transfer property. There are recording fees involved, but that is not a tax. Kansas also has no transfer tax, but you pay a mortgage registration tax of 0.1% (2019).
Some states may not have a high property transfer tax. But that doesn’t mean the overall transfer tax won’t be high. This is because other entities charge fees that contribute to the transfer tax. These entities can include the local school board, city, and county.
Who Pays The Transfer Tax?
The buyer generally pays the transfer tax based on the sales price. However, the buyer and seller can negotiate this. For example, the seller may end up paying the transfer tax at closing.
In some cases, the municipality may decide who pays the tax.
How Much Is The Transfer Tax?
Assuming there is a transfer tax, it can be from less than one percent of the sales price to a few percentages. 2-3% is fairly common.
The property transfer tax is not exclusive to real estate. It also applies to stocks and bonds. However, levying a transfer tax on other asset transfers can be different from that of real estate.
Utilizing a good real estate or estate attorney can help ensure the transfer process is done right and that you don’t overpay on transfer taxes. Especially when transferring multiple properties across many states — It can become very complex.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.