Property transfer taxes are taxes on property transfers. The transfer transaction is similar to a buy/sell transaction in that ownership of the property changes. There is still a closing, potentially a real estate agent, fees, and the title. However, unlike a buy/sell transaction, there are no funds involved.
The main fee involved in a property transfer transaction is the transfer tax. This tax is sometimes called an estate or gift tax. Let’s look at what transfer tax is and if it is tax deductible.
Let's get right to the point. The bad news is that 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 property sale 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.
The property transfer process, fees, and 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.
The buyer generally pays 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.
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.
Property transfer taxes are 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 an experienced real estate attorney can help ensure the transfer process is done right and you don’t overpay on transfer taxes. Especially when transferring multiple properties across many states, it can become very complex.