Transfer taxes are charged by the government when ownership of property is transferred from one individual to another. The total amount of the tax is based upon the total value of the property being sold. This tax can be imposed by a city, state or county in order for a seller to transfer a title, certificate or deed to a buyer. Transfer taxes are not deductible from state or federal taxes. 

Most often, the seller is responsible for paying the transfer tax on real estate; however, this is often negotiable. The party responsible for paying the transfer tax can vary depending on what is most common in that real estate market. In certain states, both parties are required to pay some sort of transfer tax and in other states, if the seller is exempt or does not pay the tax, the buyer assumes responsibility for the transfer tax. In real estate transactions, the transfer tax can be more than 4% of the property’s sales price. 

Transfer taxes are charged by the government when ownership of property is transferred from one individual to another.Photo: Giorgio Trovato/Unsplash

The transfer tax is known across the U.S. by a few different terms: stamp tax, mortgage registry tax or deed tax. Twelve states do not impose any transfer tax on real estate: Alaska, Idaho, Indian, Louisiana, Kansas, Mississippi, Missouri, Montana, New Mexico, North Dakota, Texas, Utah and Wyoming. Certain states do not charge a transfer tax on top of mortgage recording taxes when a property is bought and sold; however, high-cost cities such as New York City charge both, which can significantly increase closing costs.

The transfer tax is calculated based on a percentage of the fair market value for the property that is being sold, but the rates and rules vary widely depending on the state. In most states, the tax rate increases for each $500 worth of value. The states with the highest rate for transfer taxes include New York, California, Florida and Illinois. 

Inheritance and estate taxes

Inheritance and estate taxes can also be considered transfer taxes. When one individual dies and passes on a taxable inheritance to another individual, this is referred to as an estate tax. At the federal level, the estate tax covers the transfer of gifts or estates valued over $11.7 million note: add per individual? over the course of a lifetime as of 2021, so the majority of Americans are exempt from having to pay these taxes. The progressive tax for an estate of that size ranges from 18% to 40% of its overall value. 

Individuals who give a gift above $15,000 in one year to a single person or entity are required to file a gift tax return, but this does not mean they have to pay a gift tax, the gift just has to be disclosed. Any and all gifts given to multiple individuals under $15,000—even if their sum total is more than $15,000—within the same year do not need to be disclosed. 

Another type of transfer tax called the generation-skipping transfer tax is applied to the transfer of title when property is passed down through a family and skips a generation. This tax was meant to prevent families from attempting to skirt the estate tax by passing along an inheritance directly to a grandchild. The same exemptions to the estate tax apply to the generation-skipping transfer tax.

For information on property tax laws around the world, see Mansion Global’s Tax Talk column.