Taxes are never a fun subject, but they are necessary. What taxes will you have to pay on your real estate transaction in Virginia? Let's take a look at how Virginia real estate transfer taxes work, how much you can expect to pay, and who is responsible for paying taxes.
What Are Real Estate Transfer Taxes?
It comes as no surprise that taxes factor into real estate transactions as well. Most people are probably aware of capital gains taxes that the seller may have to pay depending on the profits of the sale.
However, there's another type of tax that must also be paid in most states. The real estate transfer tax goes by many names. The deed tax, mortgage registry tax, stamp tax — to name a few.
Whatever it’s called, it's levied by the state and possibly the county or municipality where the property is located whenever it changes hands. The amount you’ll pay varies widely as the rules in each state are all over the map.
Let's look at what you can expect from Virginia real estate transfer taxes.
Who Pays Transfer Taxes in Virginia: the Buyer or the Seller?
As with most things in a real estate contract who pays the transfer taxes is up for negotiation. However, in Virginia there is a typical way that it happens.
The state of Virginia actually charges several transfer taxes. Three of them are considered deed transfer taxes and the other two are recordation taxes. We'll get into how much those will cost in just a moment.
The buyer typically pays the state transfer tax as well as the county or city taxes if applicable. The buyer also pays the recordation taxes or “mortgage stamps.” The buyer needs one stamp from the state and one from the city or county.
The state of Virginia also charges the seller a separate transfer tax. This is called a grantor tax.
How Much Are Transfer Taxes in Virginia?
How much does this all add up to? Let's take a look at typical charges.
The grantor tax that the state charges the seller is $1 for every $1,000 of the sale price, or roughly 0.1%. In some areas in Northern Virginia an additional $0.15 is charged per $100, or roughly 0.15%.
The state transfer tax that the buyer has to pay is $0.25 for every $100 in the sale price, or 0.25%. If there is also a local county or city tax this amount is usually equal to one third of the state tax. The mortgage recordation fees are taxed at the same rates, but on the amount of the loan rather than the sale price.
Needless to say, transfer taxes in Virginia are a hefty closing cost. You need to be prepared for that.
Can You Deduct Transfer Taxes?
You may already be aware that property taxes are deductible when it comes to doing your taxes each April. Naturally, you may then be wondering if transfer taxes offer the same benefits.
Unfortunately, they don't. But if you are the seller there is one way you can use transfer taxes to your advantage at tax time. You can use them to reduce the amount upon which you have to pay capital gains taxes.
Many people don't have to pay capital gains taxes because of the $250,000 exclusion ($500,000 for married couples). What does that mean? Simply put, $250,000 (or $500,000) of your profit is not taxable if you meet the exclusion requirements.
How is profit calculated? Take the price that you paid for the home and add to it the cost of any improvements you've made over the years. This is called your cost basis. Your profit is determined by subtracting the cost basis from the sale price.
So how do transfer taxes help? You can add the amount that you pay in transfer taxes to your cost basis, thus reducing the amount of taxable profit.
Keep in mind that transfer taxes are typically paid by both parties at the time of closing. As the seller, you can take it out of the sale price of the home (as long as you made enough profit). As a buyer, though, you'll have to be prepared for that extra amount you'll have to pay in closing costs.
Note: if capital gains taxes are due for the seller, these will be paid at tax time and not at closing.
We've provided you with a general idea here, but the specifics of transfer taxes vary by location. It's always best to consult with a local expert to know exactly what to expect.
An experienced, local real estate agent is the perfect resource. Whether you're planning to buy or sell a home having a real estate agent is invaluable not only for figuring out transfer taxes but also during the entire process.
To learn more about the benefits that working with Clever can offer contact us today.