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 these situations seldom occur.
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. Transfer tax rates can vary widely from county to county, so it’s important to work with an experienced real estate agent who can advise you on what you’ll be subject to paying.
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 their own transfer tax. In most counties this is $0.55 for every $500 of property value, or 0.11% of the total transferred property’s value. In counties with over two million residents, the rate can increase to $0.75 per $500 (0.15%), however, the largest county in Michigan currently does not meet the population cutoff, so this is not an issue at the moment.
In total, sellers (unless otherwise agreed upon) in Michigan will be required to pay between 0.86% and 0.9% of their home’s value in transfer taxes. Currently, no one will pay over 0.86%. However, if the population in Michigan’s largest counties increases, the rate there will increase 0.04% to reach 0.9%.
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, because homes appreciate and depreciate in value, you are able to apply regulations regarding capital gains tax to your advantage.
If your home appreciated in value since you bought it, you will be required to pay capital gains tax in many cases. 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, meaning you’ve reduced your tax exposure by $4,300.
Unfortunately, if your home depreciated in value, you are not able to deduct the losses.
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. While transfer taxes are paid at closing, capital gains tax on the home is paid along with your regular annual taxes.
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.
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