Transfer taxes, broadly defined, are any taxes that are charged upon the transfer of ownership, specifically upon the ownership of property such as vehicles and real estate. This tax is also referred to as an excise tax.
Texas is one of 13 states that has no transfer taxes. So if you're buying or selling a home in Texas, you don't need to worry about them.
Transfer Tax Overview
Real estate transfer taxes, as well as who pays them, are variable by location and contract. During the negotiation phase of the transaction, you and your real estate agent will negotiate who pays the transfer tax at the time of the sale. This information is then included in the contract.
Typically, the seller will pay the transfer tax. The transfer tax can also be a series of taxes at the local, state, and federal levels. The seller usually takes care of all of them.
Can You Deduct Transfer Taxes?
Typically, you cannot deduct transfer taxes. However, sometimes you can wrap them into the cost basis of the property.
The cost basis of the property is basically what you paid to acquire it. This can be helpful due to the capital gains tax that sellers usually have to pay.
Capital gains taxes are the taxes that you pay on the amount your home has appreciated. You take a capital gains loss if it depreciated. Your capital gains are usually calculated as the sale price minus the cost basis. Therefore, if you can wrap your transfer taxes into the cost basis of your home, it can save you money in the long run.
That being said, since Texas property owners and sellers don't have to worry about any of this due to there not being a transfer tax in Texas, this acts more as helpful information than anything else.
Regardless of who is responsible for the tax, transfer taxes are typically paid at closing. The amount of the tax is included on the HUD-1 settlement forms. Note that capital gains taxes are charged by the federal government, so even in states like Texas that don't have a transfer tax, you'll still have to be aware of the capital gains tax if you're a seller. Capital gains are paid when you file your taxes.
While it's very beneficial that Texas doesn’t have a transfer tax, it does come at an expense. Texas has some of the highest property taxes in the entire country. While for the most part, the national average as far as property taxes go sits around 1.2%, it's upwards of 1.9% and even higher in some areas of Texas.
You’ll also have to consider realtor fees, various insurance costs, and other financial responsibilities.
This just goes to show that even though you don't have to worry about one type of fee or tax, that doesn't mean that transferring real estate, whether you're buying or selling it, is low-cost or free. Always be sure to speak with a tax professional as well as your real estate agent to make sure you haven't missed anything come tax time.
It's also worth noting that the status of transfer taxes in Texas is not necessarily guaranteed. There has been a long-standing battle at the polls when it comes to how and if real estate transactions should be taxed. While Texas tends to be a very real estate-friendly place to live, there's always the chance that the future voting behavior of its populace will change the transfer tax policy to be less favorable. Because of this, it’s always good to be prepared.
Even though Texas doesn’t have a transfer tax, it's still important to work with a local, experienced real estate agent to help you through the buying or selling process. An experienced agent can help you with other fees and taxes like closing costs and capital gains tax. They can also be an advocate for you through the entire process.
Both buyer’s agents and seller’s agents can help you get the best deal, find rebates where available, and some will even work on a flat fee basis.
Real estate transactions are complicated and confusing, and there are a lot of things to consider that aren't necessarily common sense. Whether you're buying your first home or selling your fifth, be sure to work with a trusted agent in your area to navigate the process successfully.