What are real estate transfer taxes? Who has to pay them? Learn about real estate transfer taxes for the state of Rhode Island.
The average home buyer who purchases a $150,000 home will pay approximately $3,700 in closing fees. The fees may include an application fee, an attorney fee, the cost of a credit report, the cost of a home inspection, and the lead-based paint inspection.
All of these fees are somewhat reasonable. The bank incurs costs from processing your loan, so you help pay for the cost by paying an application fee. An attorney needs to get paid for looking over the legal documents involved in buying and selling a piece of property.
But did you know that a large chunk of your closing cost is another tax? This tax goes by many names, such as deed tax, mortgage registry tax, or stamp tax. The most common name for this tax is the real estate transfer tax.
When the transfer tax is paid, the ownership of the property is transferred from the seller to the buyer.
This tax, which can be collected by the city, county, or state (or all three), is usually based on a percentage of the sale price of your home. Since this tax is highly regional, it is essential that both buyers and sellers work with an experienced real estate agent, so both parties understand their financial responsibility regarding this expense. Your agent will give you a head's up regarding what taxes are applicable in your area. No one wants to be surprised by a city, county, and state tax at closing.
Who Pays Transfer Taxes in Rhode Island: the Buyer or the Seller?
The seller is usually responsible for the realty transfer tax.
Proof of payment is stamped on the deed so the Rhode Island recording clerk can see that the tax was paid.
Check with your local real estate agent to see if there are any exemptions for this tax. Some states allow family members to transfer property without paying the realty transfer tax, but it is not clear whether or not Rhode Island is such a state.
How Much Are Transfer Taxes in Rhode Island?
The current rate for the Rhode Island transfer tax is $2.30 per every $500 of the sale. Part of this money goes to the local government and part goes to the state.
For a $150,000 home, the seller in Rhode Island will pay $690 for the state transfer tax.
Can You Deduct Transfer Taxes?
While property taxes may help relieve your tax bill at the end of the year, transfer taxes are not tax deductible. The IRS does not consider transfer tax a "sales tax."
If you are the seller, you can include the transfer tax in the "cost basis" of the property.
This is how it works:
You sell a property and make money on the sale. You may be charged a capital gains tax on the amount of money that you made. The amount you spent on the transfer tax can be subtracted from your profit so that your capital gains tax bill can be reduced.
This reduction isn't even necessary if you owned the home for more than two years. If you lived in the house for two of the last five years, a married couple could exclude $500,000 of capital gains anyway.
When learning about complicated issues like taxes and closing costs, sometimes it is easier to have a professional sit across the kitchen table from you to explain things. That's why you should reach out to a Clever Partner Agent in Rhode Island.
Whether you are buying or selling a home, your real estate agent will talk you through the process and make sure you understand all the different fees and taxes that you will be charged at closing.
One thing to remember, our agents often sell for a flat fee. Rest assured that's one expense that won't be a surprise on closing day.