What is a transfer tax?

Buying a home requires a transfer of legal ownership, which often comes with transfer taxes. Not all state or local governments charge transfer taxes, but many of them do. Read on to learn what are transfer taxes and how they work. We'll also consider when you're required to pay a real estate transfer tax and how it's calculated.

What is a real estate transfer tax?

A real estate transfer tax is a one-time charge imposed by a state, county, or municipality when a property's title or deed is transferred from one party to another. You might also hear transfer tax referred to as a deed tax, stamp tax, documentary transfer tax, mortgage registration tax, or recordation tax.

The transfer tax rate is usually determined on a local level. Then, using the property's value and type, a transfer tax is calculated and paid by one or both parties. Transfer taxes are typically not deductible from federal or state income taxes.

How does a transfer tax work?

As we've discussed, a transfer tax is one type of property tax you may pay during a real estate transaction. State or local governments impose a transfer tax any time property ownership is transferred.

While the concept of a transfer tax is simple in theory, there are many important details to be aware of when you're handling a real estate transaction. Let's dive deeper into how transfer tax works.

How are transfer taxes determined?

Transfer taxes are determined by several factors, some of which include:

• Property value: How much you pay in transfer taxes will largely depend on the property's value at the time of transfer. Since the transfer tax is a percentage of this amount, you'll be taxed more for properties of higher value.
• Local tax rates: Transfer tax rates vary by state. Local governments, such as counties or cities, sometimes also set their own tax rates, which affect your bottom line for real estate transactions.
• Property type: The type of property you're buying, selling, or inheriting can also play a role in your transfer tax price. Depending on a state’s unique economic needs, your local government may tax commercial or industrial properties at a higher rate.

State transfer taxes

The rules governing transfer taxes vary by location. Each state, county, and local municipality has the right to impose its own distinct transfer tax rate along with other stipulations. Some states have lower transfer tax rates, while others have none at all.

The following states do not impose a transfer tax:

• Alaska
• Arizona
• Colorado
• Idaho
• Indiana
• Kansas
• Louisiana
• Mississippi
• Missouri
• Montana
• New Mexico
• North Dakota
• Oregon
• Texas
• Utah
• Wyoming

Who pays the transfer tax?

In most states, the seller is required to pay the transfer tax on real estate transactions. In other states, the buyer and seller split the cost equally. Depending on the real estate market and negotiations, the responsibility could fall entirely on the buyer.

However, buyers and sellers are usually able to negotiate who will pay the transfer tax.

When would I need to pay transfer tax?

Paying a transfer tax is typically required whenever ownership of real estate is transferred from one individual or entity to another. Your state or local government will have specific guidelines on whether a transfer tax applies to the following real estate transactions:

• Buying or selling a home
• Gifting property
• Inheriting a property
• Moving property into a trust

How is transfer tax calculated?

To calculate how much you owe in transfer tax, you'll need to know your property's sale price and the transfer tax rate in your area. Then, multiply the sale price by the transfer tax rate to determine your transfer tax.

For example, say your property is being sold for $405,000 with a transfer tax rate of 1%. The formula is:

Property sale price x Transfer tax rate = Transfer tax price

$405,000 x 0.01 = $4,050

In this example, you would pay $4,050 in transfer tax.

While the example above shows how to calculate using a rather simple tax rate, many states have two different transfer tax rates – one for the state transfer tax and another for the county transfer tax. If you're not up to crunching the numbers, you can use an online transfer tax calculator to estimate how much you'll pay in transfer taxes. You also can consult a real estate professional or your local tax authority.

The bottom line: Transfer tax is paid on home sales

Calculating transfer tax rates ahead of closing on a real estate transaction helps you budget effectively. Knowing what to expect with transfer taxes can speed up and smooth out your real estate sale.

Transfer tax rates and rules vary by location. Before moving forward with a property transfer, carefully research your local transfer tax rules.

Understanding your transaction costs is one more step, along with getting preapproved for a mortgage, in finalizing your home purchase or sale. Get approved with Rocket Mortgage to explore your options.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC.