When you buy or sell a home, you're liable to pay a transfer tax. This money is collected by the government to facilitate the change of ownership. Read on to find out about the laws around transfer taxes in Pennsylvania.
Transfer tax is imposed by the state or local government to facilitate the change in ownership of a piece of property. The amount is always a percentage of the selling price of a home or its appraised value.
Each state, city, and county has its own rules about how much buyers and sellers need to pay in the form of transfer taxes. In certain cases, you may pay a part of the tax to the state and another to local authorities. Let's take a look at how Pennsylvania treats transfer taxes.
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Who Pays Transfer Taxes in Pennsylvania: the Buyer or the Seller?
According to the Pennsylvania Department of Revenue, both the seller and buyer are held jointly liable for the payment of transfer tax. What that means is that the two parties often split the cost equally between themselves.
In reality, however, the payment of transfer tax is often a matter of negotiation between the buyer and seller. In a seller's market, the seller may be able to get the buyer to pay the transfer tax in its entirety. Quite simply, it comes down to who has the leverage in that particular market.
A majority of the amount you pay in transfer tax as a buyer or seller in Pennsylvania is directed to the state's General Fund. 15% of the collections are contributed to the Keystone Recreation, Park & Conservation Fund. This is a fund dedicated to the creation and preservation of green spaces and recreational areas across the state of Pennsylvania.
How Much Are Transfer Taxes in Pennsylvania?
In Pennsylvania, transfer tax is split between the state, local municipality, and school district.
The tax percentage owed to the state is the same across Pennsylvania. One percent of the selling price of a home is directed to the state's Department of Revenue.
The tax imposed by the local government and school district varies from place to place. In Philadelphia, for example, 3.278% is paid to the city along with the 1% paid to the Commonwealth. Bellevue, in Allegheny County, charges 1.5% in transfer taxes.
The exact amount that you'll pay in transfer tax will depend on the county or city in which you're located. A local real estate agent will be able to tell you about the taxes you can expect in the area where you're located.
Can You Deduct Transfer Taxes?
The IRS makes it clear that transfer taxes cannot be deducted from your tax returns. What they can do, however, is to reduce your tax exposure when capital gains are calculated.
Let's say you pay a transfer tax when buying a home in Pennsylvania. When you sell that same home, you will have to pay a capital gains tax. That is tax paid on the amount by which the value of your home has appreciated.
Your capital gain is the difference between the selling price of the home and its cost basis. When determining the cost basis of your home, you can add your transfer tax to it. In that way, the transfer tax reduces the amount you will have to pay in capital gains tax while selling a home.
The same idea applies if you paid a transfer tax while selling your home. The amount that you paid can be deducted from the selling price, thus reducing your capital gains tax.
In Pennsylvania, there are a few different kinds of real estate transactions that are exempt from transfer taxes. Certain sales made to or by government organizations, between religious entities, and involving a nonprofit development agency don't require the payment of a transfer tax. You can also qualify for an exemption if you're inheriting property through intestate or testate succession.
There are various nuances involved in the way different taxes are imposed and calculated on the purchase of a home. Working with a real estate agent can help you figure out exactly what taxes you need to pay and how much. A real estate agent is also a valuable resource when it comes time to go into negotiations with the seller.
If you're looking for an experienced real estate agent near you, Clever can help. Clever Partner Agents are sourced from the country's top brokerages. They have many years of experience facilitating sales and helping clients navigate the home buying process. Buyers who work with a Partner Agent receive a $1,000 rebate, which can be used to pay for closing costs.
If you're ready to have a Clever Partner Agent help you calculate and file your transfer taxes, fill out the form on our website.