When you sell your home, titles are transferred from your name to the buyer’s name. The state government charges a fee to do this. Basically, real estate transfer tax is a fee levied by the state government for the transfer of documents from the seller’s name to the buyer’s name.
The tax amount itself varies from one state to another, but it’s usually based on the selling price. In most cases, sellers pay the transfer tax. However, there’s no law that says that it’s the seller’s responsibility.
So, in the real world, the seller and the buyer negotiate this before the sale. However, if the seller — for whatever reason — is exempt from paying tax, some states require the buyer to pay the transfer tax.
California doesn’t really care who pays the transfer tax as long as it’s paid on time. That being said, not paying the transfer tax is one sure way to invite lawsuits
Who Pays Transfer Taxes in California: The Buyer or the Seller?
Most purchase agreements, as a standard feature, state that the seller will pay the transfer tax. However, in the real world, sellers have the ability to negotiate. The state doesn’t really care who’s paying, and some buyers may be willing to pay the taxes in exchange for concessions - such as a discount on the home price.
In some cases, sellers might also be exempted from paying taxes. Buyers will have to pay it in such situations, regardless of what concessions are offered.
So, what happens if both the seller and the buyer don’t pay the property transfer tax?
In this case, the taxes will still default to the seller. This mention in the purchase agreement is good enough for the government to hold you responsible.
So, if you’ve negotiated a deal where the buyer pays the transfer taxes, make sure that this is reflected on the purchase agreement. The government is only concerned about what the purchase agreement states.
Just to be on the safer side, sign the agreement in the presence of your real estate agent. Agents see and work on agreements all the time. Having your agent by your side will help you understand the agreement and its terms much better.
How Much Are Transfer Taxes in California?
Property transfer taxes are derived from the selling price of your home. The California Revenue and Taxation Code states that all the counties in California have to pay the same rate.
The current tax rate is $1.10 per $1000 or $0.55 per $500. So, if your home sells for $300,000, the property transfer tax is $330.
Keep in mind that many cities and locales in California have the authority to add additional transfer taxes on top of the standard county rates. Alameda County, for example, may charge up to $12 per $1000 of home value! Be sure to check local rates before signing a purchase agreement to ensure you’re not blindsided by an unexpected tax.
Can You Deduct Transfer Taxes?
According to the Internal Revenue Service (IRS), property transfer taxes cannot be deducted from your income tax return. However, you can deduct transfer taxes from your overall capital gain.
When you sell a home, you have to pay the capital gains tax on your profits. You can deduct the transfer tax amount from your capital gains. This way, you make a lesser profit, which in turn means that you have to pay lesser tax.
So, even though you can’t deduct transfer taxes directly from your income tax, you can lessen your tax burden indirectly by paying lesser capital gains tax.
The transfer tax has to be paid during the closing of the deal. It doesn’t matter who pays it but it has to be paid when a deal is being closed. HUD-1 statement forms indicate how much needs to be paid. It also outlines the procedure for payment.
In most cases, the property transfer tax is paid by the seller. So, when you’re filing your taxes, make sure to deduct the transfer tax from your capital gain.
This is especially important because capital gains tax is paid to the federal government and the transfer tax is paid to the state government. So, chances are, you’ll be paying both these taxes separately, and at different times.
So, remember to deduct the property transfer tax from your capital gains.
Given that there are quite a few procedures and laws to follow, it’s a good idea to hire an expert local real estate agent to help you out. Real estate agents do a lot more than just list your homes online. They take care of the paperwork too.
Real estate agents also negotiate on your behalf and given that they do it almost every day, you know that they’ll make sure that you get a great price for your home.
Clever only works with the very best agents in any given area. Irrespective of whether you’re a buyer or a seller, you know that the person representing you is one of the best in the business.