When a house is bought or sold, many states and counties levy taxes on the value of the property being transferred from one party to the other. In this article, we're going to go over who pays these taxes in Michigan, how much they'll cost you, and how to reduce your tax exposure.
Real estate transfer taxes are taxes paid upon the transfer of real property from one party to another. Since most states do not charge sales tax on real estate sales, transfer taxes act as somewhat of a stand-in that allows the state and county to generate revenue on home sales.
Not all states have mandated transfer taxes, and these taxes can vary greatly on the state, local, and regional levels. For this reason, it is extremely important to work with an experienced real estate agent that knows all the regulations regarding Michigan real estate transfer taxes. Tax evasion is nothing to flirt with, so it's best to work with a qualified agent to ensure that you don't get yourself into trouble with local or state authorities.
Who Pays Transfer Taxes in Michigan: the Buyer or the Seller?
Unless otherwise agreed upon, transfer taxes are customarily paid by the seller of the home. In certain circumstances, there may be an agreement that the buyer will pay the tax instead of the seller, but this needs to be negotiated in the purchase agreement.
Under normal circumstances, the seller will be required to pay a portion of the sales price to both the county the home was sold in and to the state of Michigan.
How Much Are Transfer Taxes in Michigan?
The state transfer tax rate in Michigan is $3.75 for every $500 of property value, or 0.75% of the transferred property's value.
In addition to the state tax, each individual county levies an additional transfer tax of $0.55 per $500.
In counties with over two million residents, the current tax law allows the rate to increase to $0.75 per $500 (0.15%). However, even the largest county in Michigan is currently below that threshold, so the higher tax rate is not currently in use.
In total, sellers (unless otherwise agreed upon) in Michigan pay 0.86% in transfer taxes.
Can You Deduct Transfer Taxes?
Unfortunately, unlike property taxes, the IRS does not allow you to deduct transfer taxes on your annual tax return. However, they can help you with capital gains taxes.
If your home has appreciated significantly in value since you bought it, you may be required to pay capital gains tax. Currently, the IRS allows you to exclude $250,000 of capital gains if you're single and $500,000 if you're married.
If you exceed these cutoffs, you can reduce your tax exposure by adding the transfer tax onto your cost basis, the price you paid for your home when you bought it. Let's look at an example:
Say you bought your home for $200,000 — the cost basis — and you're currently selling it for $500,000. You will have made $300,000 in capital gains, so you will need to pay capital gains tax on $50,000. However, if you paid 0.86% in transfer taxes upon closing ($4,300), you can add that onto the cost basis to bring it up to $204,300. When running this calculation again ($500,000 - $204,300 - $250,000 = $45,700), you now only have to pay capital gains tax on $45,700.
Generally, transfer taxes are paid upon closing. The amounts required will be noted on the HUD-1 that both parties sign during the closing procedure.
Real estate transactions can be confusing and intimidating events filled with tons of small print and legalese. Luckily, a qualified real estate agent can help walk you through the red tape and make the entire process a much simpler and pleasant experience. Whether you're buying or selling, finding a top-notch real estate is one of the most important pieces of the puzzle.
If you're selling your home, Partner Agents will list your home for only $3,000 or 1% of the closing price. If you're buying a home, you may instead be eligible for Clever Cash Back, netting you 0.5% of the home's purchase price as a bonus check. To get in touch with a qualified local real estate agent, fill out our form and someone will contact you shortly.