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What is real estate transfer tax? (and Who Pays It?)

July 03 2018
by Leisl Bailey

Real estate transfer tax

 

The word tax has become such a dirty word in today’s society. Most people cringe when they hear that they must pay taxes on the sale of their house. When you’ve been making payments on a house for so long and finally can look forward to getting a return on your investment, it’s tough to part with a portion to the government. One of these taxes you have to pay when you sell your home is real estate transfer tax.

What is Real Estate Transfer Tax?

Real estate transfer tax is a percentage charged by states, counties, and municipalities of the government of the United States of America. These taxes are also known as real estate conveyance taxes, mortgage transfer taxes, documentary stamp taxes, and property transfer taxes.

These taxes are for filing purposes and to fund land development and HUD properties.

Do I pay real estate transfer tax on the value or sale price of my home?

You pay on the value of your home. This is great news for those sellers who sold their home for more than it’s appraisal value. In a seller’s market, homes will sometimes go for more than their value, which means the seller doesn’t have to pay as much in this type of tax.

If you are selling your home for a discount rate or less than the value, however, this is bad news. Homes are only worth what someone is willing to pay for it, but to the government, the price is dependent upon the comparative market analysis, value of the property, as well as the value of any updates done to increase the value. If your home is worth $400,000, but only sells for $340,000, you still end up paying transfer tax on $400,000. That difference could be quite significant depending on which county you live in.

How much do I pay in real estate transfer tax?

The percentage that you pay toward real estate transfer tax varies from state to state and county to county. In Iowa, for example, the transfer tax is $0.80 for every $500. So, if you sell your home for $750,000, you’ll end up paying $1,200 in transfer tax. If you live in New Jersey, however, transfer tax includes several different fees, and each is dependent on the price and value of your home.

Who pays real estate transfer tax?

Ah, the question everyone really wants to know.

As with most closing cost questions, the answer is: it depends. It is dependent upon the market as well as the county the sale is happening in.

In a Sellers Market

If you are in a seller’s market (which, on the date of this publication, we are), the buyer will most likely pay the commission. This is because the seller has more power in the sale. They can choose just to hold out on selling the home until they get an offer from someone who is willing to pay the taxes. Waiting is in their best interest because it could potentially save them $1000 or more on the sale of their house.

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In a Buyer’s Market

In a buyer’s market, the seller usually ends up paying the real estate transfer tax. That’s because, in a buyer’s market, the buyer has the upper hand. The buyer can essentially walk away from any transaction where they are required to pay the tax.

It Depends on the County

Tradition also plays a big part in deciding who pays up in real estate transfer tax. If it’s typical for the seller to pay it, then it’s usually placed that way in the contract and gets changed only if the seller decides to negotiate.

Some counties (such as New Hampshire), require both the buyer and the seller to pay the transfer tax. It such counties, the cost of the tax is split down the middle, though negotiations still take place.

As with most closing costs, the real estate transfer tax is one that is highly negotiated and passed between buyer and seller before the close of the house. It’s a good idea to check with your contract to see who assumes responsibility and how much they have to pay toward this tax.

What if you receive or inherit the house?

What if, instead of purchasing the home yourself, you inherit it or have it gifted to you. Do you still have to pay real estate transfer tax?

Yes, yes you do. And here’s why.

You must pay real estate transfer tax in any real estate transaction where the owner of the title changes hands. So, if your great aunt, Madge gifts you the home that she purchased at $250,000, but is valued at $500,000 you will have to pay transfer tax on the value (or $500,000) of the home. The state and county in which the home resides determine the amount of tax to be paid, however. For example: if the home you inherit is in Massachusetts (and you DON’T live in Barnstable County), you will end up paying as much as $2.28 for every $500. This turns out to be $2,280. While this is a steal of a deal for a $500,000 home, it is a bummer for those excited to score a free home.

Need an expert real estate agent to help you navigate the sale? You need Clever. Clever uses the top agents in your area to ensure the highest level of service. Call us today at   1-833-2-CLEVER or fill out our online form to get started.

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