One of the biggest costs after closing a home sale is the transfer tax. But what exactly are they? Here's what you need to about Washington real estate transfer taxes, who pays them, and how you can limit your tax exposure after closing.
They are one of the biggest expenses at the end of a real estate transaction. But few home buyers or home sellers are aware of real estate transfer taxes, what they are, and how much they cost.
Transfer taxes are collected by counties, municipal authorities, and states on almost every real estate transaction. They vary from state to state, and in most states, including Washington, the home seller will pay the transfer tax.
This is usually done when the seller transfers legal deeds, certificates, and titles to the property that is being sold. Washington's transactional tax on real estate is formally known as the Real Estate Excise Tax, or REET. It is determined by the assessed value of the property being sold and is typically calculated as a percentage of the sale price.
Just more than 1% of revenue collected through the real estate transfer tax covers administrative costs of the county. Another 6% goes into public works and an education fund, while the remaining amount goes into a general fund for the state.
Here's what else you need to know about Washington real estate transfer taxes.
Who Pays Transfer Taxes in Washington: The Buyer or the Seller?
Sellers are required to pay the transfer tax in Washington State. But there's an important caveat for buyers. They are liable for the tax if it's not paid.
Sometimes sellers and buyers can come to a deal on who will pay this tax and how much. It's important to note that when you buy a property everything is up for negotiation and that includes who will pay the transfer tax (or what portion of it). A buyer and seller can even decide to split the tax cost equally between them.
How Much Are Transfer Taxes in Washington?
The REET in Washington State is:
- 1.1% on homes less than $500,000
- 1.28% on homes between $500,000 and $1,500,000
- 2.75% on homes between $1,500,000 and $3,000,000
- 3% on homes more than $3,000,000.
But home buyers and sellers should note that many local jurisdictions impose their own additional transfer tax in addition to the REET.
Can You Deduct Transfer Taxes?
The costs of selling and buying a home can add up. Some of the costs are tax-deductible, others are not. Unfortunately, transfer taxes are not tax deductible for either the buyer or the seller. Although transfer taxes cannot be deducted as a sale of personal property, they can be deducted as a work expense, but only if the property is used as a rental home or a real-estate investment.
To make sure that you fulfill all the legal and tax requirements, it's best to talk to a professional realtor about other restrictions and tax benefit you may be entitled to.
Transfer taxes can save you money, even if they are not tax deductible.
They are considered part of the cost basis of the property that is used to calculate the final capital gain if the property is sold. Raising the cost basis of the home decreases the total gain on sale and your tax exposure. That means you will pay less in total taxes on the gain.
For example, if you bought a house for $200,000 and sold it later for $500,000, your capital gain would be $300,000. That means you must pay taxes on a capital gain of $50,000, the amount by which you have surpassed the limit of $250,000 that is free from capital gains taxes. (The limit is $500,000 for joint returns.)
If you paid $10,000 in transfer taxes, you can add this to the home's original property value. In other words, your capital gain will be $40,000, not $50,000 and your tax assessment would reflect this.
Taxes are a complicated part of the home selling and home buying process. But you don't need to learn the “ins and outs” of real estate taxes by yourself.
A Clever Partner Agent can help you navigate all the fees and taxes that you will have to pay whether you are buying a home or selling one. They can also let you know about negotiating who will pay the tax, the buyer or seller.
All Clever Partner Agents are up-to-date on the current trends of the real estate market and are also familiar with all of the legal and tax implications of home sales. They are top negotiators from major companies like Keller Williams, Century 21, and RE/MAX. They are also full service, so you will not sacrifice any benefits while saving money.