Trading properties come with tax implications. Read on to learn all you need to know about real estate transfer tax here.
Real Estate

What Are the Transfer Taxes on Real Estate?

Are you in the process of buying or selling your home? Or do you plan to do so in the near future? If so, you should know that there are quite a few fees you are going to need to pay.

When you buy a home, you are going to need far more than just a down payment. Filling out the paperwork to buy or sell a home is a long process that requires the assistance of many different people and entities.

And they all need to get paid.

One of these fees is the real estate transfer tax. You can’t forget about Uncle Sam. This is part of the transfer taxes at closing that you need to be aware of.

So what is a transfer tax in real estate? And who pays real estate transfer tax? Keep reading for answers to all of your land transfer tax questions below. 

List of Closing Costs

Before getting into the nitty-gritty of transfer taxes, let’s take a quick look at the closing costs associated with most home purchases. There are quite a few expenses lumped into this thing we call “closing costs,” and they are quite similar, regardless of whether you are buying a home in the US, Canada, or other western nations. 

Deposit

For starters, you’ll need to make a deposit when you submit your offer. This just lets the seller know you are serious about buying the property. This can be as low as a few hundred dollars, or it can be between 1-5% of the total purchase price.

Usually, a certain amount isn’t required. And the deposit goes towards your down payment. But the higher the deposit, the better your offer is, increasing your chances of getting it accepted.

Appraisal and Inspection

Once your offer is approved when buying a home, you’ll need to get it both appraised and inspected. The appraisal is the process of a professional walking through the property to ensure it is worth the amount of money you are buying it for.

Your bank needs to know exactly what the property is worth before giving you the funds needed to buy the home.

And the home inspection provides you with protection. If there are any major flaws with the home, you need to know before you buy it. If you find something you don’t like, you’ll be able to back out.

Each of these can cost a few hundred dollars. 

Title Insurance

Title insurance is usually required by lenders. This insurance policy protects you and your bank, should a problem arise with the title later on, such as the discovery of unpaid back taxes, or liens against the property. 

Origination and Underwriting Fee

These are paid to your lender for the work they are doing on your behalf. The origination fee is paid to your lender for the overall service they are provided. The underwriting fee is paid on behalf of the lender’s employees who gather all of the documentation to write and approve the loan. 

Don’t Forget the Real Estate Transfer Tax

And the last thing you’re likely to see on the list of closing costs is the real estate transfer tax. This is the tax paid to the government when a property is sold and ownership changes.

The housing market is a big business, and transfer taxes provide a significant source of revenue to local governments. In most areas, it’s the local, or municipal government that receives this tax, as opposed to the state or province. 

In Canada, the transfer tax is paid to both the city and provincial government and is paid by the buyers. 

Real estate transfer taxes are due at closing, just like any other closing cost. And they typically aren’t tax-deductible. 

How to Calculate Real Estate Transfer Tax

Real estate transfer taxes can vary widely depending on the market you are in. In Colorado, for example, transfer taxes are 0.01% of the total sales price. So on a $500,000 home, the transfer taxes would be $50, making Colorado one of the cheapest states in regards to transferring taxes.

In Florida, the transfer taxes are 0.7%. So on the same $500,000 home, the tax would be $3,500.

Some states have tiered rates. So the more expensive the home, the higher the tax. So In Hawaii, the transfer tax rate is $0.10 for each value of $100, as long as the sales price is under $600,000. For homes between $600,000 and $1,000,000, the is $.20 for each value of $100. 

States with No Transfer Tax

Want to save money when buying or selling a home? Consider moving to one of the states below, which do not impose a real estate transfer tax;

  • Alaska
  • Idaho
  • Indiana
  • Louisiana
  • Kansas
  • Mississippi
  • Missouri
  • Montana
  • New Mexico
  • North Dakota
  • Oregon (most counties)
  • Texas
  • Utah
  • Wyoming

On a home worth $500,000 or more, not having to pay transfer taxes can provide some serious savings. Depending on where you buy or sell your home, you can pay as little as $0 on this tax, or you can many many thousands of dollars, depending on the price of your home. 

Who Pays the Transfer Taxes?

So who pays for the real estate transfer taxes? In most cases, the seller is the one responsible for paying the taxes. However, in some areas, such as in Canada, the buyer is expected to pay these costs. And in some areas, the cost is split between both the buyer and the seller.

However, there aren’t hard and fast rules for this. The person to pay for the taxes can be negotiated. In a seller’s market, it’s common for buyers to cover this expense in order to get their offer approved over the many other offers on the same home. 

It’s one of those things you’ll want to keep in mind before you ever make it to the closing table. Factor this cost into your buying or selling plan, and consider if moving to a cheaper area makes more sense. 

Know the Costs Ahead of Time

Now that you know all about the real estate transfer tax and other associated closing costs, you can better plan your home purchase or sale. There are lots of fees involved, and it can get quite confusing.

Your bank and your realtor should be able to give you a detailed breakdown of these costs before you ever make it to the closing table so that there are no surprises when you go to sign on the dotted line.

Looking for more information like this? Head over to our blog to keep reading. 

Leave a Reply

Your email address will not be published. Required fields are marked *