A real estate transfer tax is exactly what it sounds like: it's basically a sales tax charged when a property changes ownership. Selling a house? Pay the taxman. Buying a house? Pay the taxman. Just transferring a house between family members? Pay the taxman. It’s like Ben Franklin said: there are only two sure things in life and death is one of them.
Of course, it's never as simple as it sounds, especially when you're dealing with tax law. Rules governing transfer taxes vary widely across states, counties, and even municipalities, with variations in rates and how they're determined. For example, transfer taxes can be as low as 0.1%, as they are in Colorado, or as significant as 4%, as they are in Pittsburgh, PA.
There’s also significant variation, nationwide, as to who's responsible for paying them. In some states, the buyer pays the transfer tax; in others, the seller may be the responsible party. And a few places are like Washington, D.C., where buyer and seller traditionally split the 2.2% transfer tax.
If you're buying or selling, the best way to understand your transfer tax exposure is to consult a tax professional or, better yet, an experienced local real estate agent. A good local agent has dealt with transfer taxes countless times before, and will have a deep understanding of the local laws and policies. Transfer taxes pay for important public services like fire departments and schools, so it's not something you want to leave to guesswork.
Who Pays Transfer Taxes in Vermont: the Buyer or the Seller?
In Vermont, the home buyer traditionally pays the transfer tax as part of closing costs. But keep in mind that, as with many other aspects of a home sale, this can be negotiated.
If the seller is quite motivated, you might be able to convince them to pay the transfer tax. Or you might offer to waive some of your contingencies in exchange for certain concessions. Again, the best way to assess potential negotiations is to consult with an agent familiar with your market.
How Much Are Transfer Taxes in Vermont?
The real estate transfer tax in Vermont is currently set at 1.45% of property value - 1.25% of that going to the state and the other 0.2% going towards a clean water fund. However, there are a few potential transfer tax rates you may be paying, depending on the type of home you’re purchasing.
- If the home you’re buying is not your primary residence, you will pay 1.45% on the full value of the property.
- If the home you’re buying is your primary residence, you will only pay 0.5% on the first $100,000 of value. The remaining value will be taxed at the normal 1.45% rate.
- If the home you’re buying is your primary residence, and you’re using a VHFA, USDA or VCTF loan, you’re exempt from property tax on the first $110,000 of value. The remaining value will be taxed at the normal 1.45% rate.
To see how this would apply to a real-life purchase, let's consider a home at the national median value of $250,000.
On this home, the home buyer would pay 0.5% of $100,000, which would come to $500. Then the second $150,000 would be taxed at 1.45%, which comes to $2,175.
In total the buyer would be responsible for paying $2,675 in Vermont real estate transfer tax on this transaction.
Can You Deduct Transfer Taxes?
Not directly, no. Transfer taxes aren't tax deductible, unless you're selling a rental or investment property, in which case they can be deducted as a standard business expense.
But the transfer tax can still reduce your tax burden down the line. That's because when the final gain on the property sale is calculated, the transfer taxes will be included in the cost basis. The cost basis is the number that’s used to calculate your total gain on the sale, which is the number you’re taxed on.
Let’s look at an example. Let’s say you bought a house for $200,000 and sold it for $500,000, for a gain of $300,000. If you’re filing as a single person, federal tax law allows you to exempt $250,000 of that gain, meaning that you have to pay taxes on the remaining $50,000.
However, if you paid transfer taxes of, say, $10,000, that’s added to the cost basis side of the equation, bringing your tax liability down to $40,000.
Regardless of who’s responsible for paying the transfer taxes on a transaction, those taxes are customarily paid at sale closing time.
Always research your state’s transfer tax rules and regulations before closing. Some states have various income-based exemptions that can save you a significant amount of money. In Maryland, for example, first-time home buyers are entirely exempt from their portion of the state transfer tax, although sellers are still responsible for their half. There’s no more deflating start to your home owning experience than paying a tax that you later learn you didn’t have to pay.
Of course, your best chance to navigate the confusing labyrinth of state and federal real estate tax codes is to partner with an experienced local agent. There’s no better teacher than experience, as the saying goes, and a good local agent has closed hundreds, if not thousands, or sales, and will have a deep and comprehensive knowledge of every aspect of a buyer and seller’s tax responsibilities.
Clever Partner Agents are all top performers in their markets, and can answer any questions you might have about selling or buying a home, tax-related or otherwise. Contact us today for a no-obligation consultation!