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Real Property Transfer Taxes

11 Aug 2011

Buyers and sellers of real property typically expect some tax consequences from the transaction. However, they generally focus on federal tax issues, in particular issues that may impact their federal income taxes. But most states also impose various taxes that may affect the total cost of the transaction, and these are often not considered. One type of tax that should be considered is a real property transfer tax. It may come as a surprise that these taxes can result in a significant amount of liability, especially if the transaction involves a large amount of real estate. Taxand US looks into real property transfer tax.

What Is a Real Property Transfer Tax?
A real property transfer tax is a tax that is assessed by states, counties and/or municipalities on either the consideration received or the fair market value of real property for the privilege of transferring it within a jurisdiction. The tax rate varies widely by taxing jurisdiction.

Real property transfer taxes are referred to differently by different jurisdictions; however, the way the tax is applied is very similar. These taxes are referred to as a transfer tax, recording tax, deed recording tax, mortgage recording tax, mortgage tax or documentary stamp tax. Regardless of the name, the real property transfer tax is typically assessed against either:

  • the property interest that is transferred from the seller to the buyer
  • the document that is used to make the transfer, such as a deed or mortgage.

The tax is typically calculated based on the consideration paid and may or may not include encumbrances and/or liens related to the property. However, if the property is conveyed for a nominal amount, many states will impose the tax on the fair market value of the property.

Another factor to consider is the legal requirement to pay the real property transfer tax. Generally, it is the seller who is legally required to pay the real property transfer tax, but certain jurisdictions require that the taxes be split evenly between the seller and buyer. Regardless of the legal requirement and the party responsible for the filing and payment of the tax, the seller and buyer should consider who will ultimately incur the liability and ensure that this understanding is explicit in the purchase/sale agreement.

To understand how real property transfer tax is assessed; information on controlling-interest transfer tax and leasehold interest transfer tax, click here to read the full article from Taxand US.

Taxand's Take

Although not the most prominent, real property transfer taxes can have a significant impact on large-scale, multi-state transactions that involve a significant amount of real property. It is important to diligently research the specific details of real property transfer and recordation taxes in the jurisdictions where the real property is located. Don't forget to identify not only the taxes due at the state level but also at the local levels, especially since the local jurisdictions typically impose the tax at a much higher rate than the state. Transactions that involve controlling interest and/or leasehold interest can also impact the overall transfer tax liability.

While time-consuming, doing adequate research on the real property transfer taxes that may affect a proposed transaction will provide a better estimate of the tax implications and, ultimately, the value of the transaction. It is imperative that sellers and buyers be aware of these taxes at the state, county and/or municipality level in order to avoid any unwanted surprises.

Your Taxand contact for further queries is:
Carolyn Shantz
T. +1 713-221-3919

Taxand's Take Author