If you are considering buying or selling a home in the state of Illinois, you'll find it helpful down the road to know about every single fee that will inevitably make an appearance before closing — including transfer taxes. Find out if you'll be responsible to pay, and how much it'll set you back.
What Are Real Estate Transfer Taxes?
Real estate transfer taxes are taxes imposed on the transfer of title of real estate property. In most cases, it is based on the value of the property transferred. The state statutes may or may not stipulate who (buyer or seller) is responsible for paying the tax. In addition, most statutes list a number of cases where the transfer is exempt from taxation.
When you buy or sell a house, you may be required to pay a transfer tax as a percentage of the sale amount. Depending on your address, it's possible to encounter transfer taxes at the city, county and state level.
Furthermore, you may also run into federal transfer taxes on property that you obtained as a gift or inheritance. The transfer taxes involved in such cases are more commonly known as the estate tax and gift tax.
Since these taxes vary on a state, regional, and local level, it's important that buyers and sellers alike work with an experienced local real estate agent to ensure they understand this process completely before selling or purchasing a new property.
Transfer taxes are separate from recording fees and mortgage recording taxes, which apply on top of transfer taxes. A recording fee is usually a small flat amount, while mortgage recording taxes are a percentage of the sale price, such as transfer taxes.
When combined, all these fees can end up constituting a significant chunk of your mortgage closing costs — if you're the one required to pay them.
Who Pays Transfer Taxes in Illinois: the Buyer or the Seller?
Depending on the location of the property, the transfer tax can be paid by either the buyer or the seller. The two parties must determine which side will cover the cost of the transfer tax as part of the negotiation around the home sale. When it comes down to the wire, the decision will ultimately be influenced by local custom, as well as the real estate market.
In Illinois, the seller is usually charged for the transfer tax, which is taken out of the seller's proceeds at closing. However, keep in mind that the tax responsibility can be changed during negotiations.
Some cities also have their own transfer taxes. Some are paid by the buyer, some by the seller and some are paid by both.
How Much Are Transfer Taxes in Illinois?
Transfer taxes are ordinarily assessed as a percentage of either the sale price or the fair market value of the property that's changing hands. State laws usually describe transfer tax as a set rate for every $500 of the property value. You may be responsible for transfer taxes at multiple levels of government, depending on where the property is located.
To calculate the transfer tax burden on the sale of real estate, you'll first need to know the transfer tax rate. Transfer tax rates are frequently charged per each monetary unit of sale price.
The state of Illinois has a transfer tax that is typically paid by sellers at a rate of $0.50 per $500, or $500 per $100,000 of property value. In addition, counties may apply an additional tax of $0.25 per $500.
Can You Deduct Transfer Taxes?
Unfortunately, transfer taxes are not tax deductible. The seller will often be responsible for paying the tax; the tax is not deductible for either the buyer or the seller.
Whether you are buying or selling, the IRS does not allow you to deduct transfer taxes, or any other taxes involved in the sale of a personal home for that matter. This includes other costs such as the recording tax paid on each mortgage.
However, transfer taxes in some areas are "deductible" from one another: the tax you pay to one level of government may reduce the tax you owe to another.
There is one exception to this standard: while transfer taxes cannot be deducted on the sale of personal property, they can be deducted as a work expense if the property is used as a rental home or a real estate investment.
Additionally, transfer taxes can be used to reduce the seller's tax exposure. This is accomplished by offsetting any capital gains earned in the sale.
Let's dive into an example: if you purchase a home for $250k and sold the same property for $520k, your gain on sale would be $270k. If you are filing alone, you must pay taxes on any gains over $250k, and $500k for married couples filing jointly.
This means you would pay taxes on the remaining $20,000. However, if you spent $8,000 in transfer taxes, these are added to the house's original property value. This brings your taxable gain down to $12,000.
Real estate transfer taxes are generally paid at sale closing time, regardless of whether it's part of the buyer's or seller's closing costs.
Wondering when these fees will pop up in the home buying or selling process? Residential real estate buyers and sellers will see the amount of transfer taxes to be paid noted on their HUD-1 settlement forms.
Real estate is also subject to capital gains taxes that are charged by the federal government and numerous states, including Illinois. If due, capital gains taxes on the sale of real estate are paid at tax filing time.
We recommend that buyers and sellers partner with an experienced, local real estate agent who can help you navigate through the complex maze of real estate transactions. Clever can help.