Among the many confusing fees and taxes you may be charged in a real estate transaction, you'll find transfer taxes. What is a transfer tax and who pays it? What can you expect to pay in Washington, D.C. if you're buying or selling a home.
What Are Real Estate Transfer Taxes?
When property changes ownership in a real estate transaction, a real estate transfer tax is charged. Real estate transfer taxes are not the same as recording fees, mortgage fees, or title fees. You'll see them on a different line item on your closing documents.
The real estate transfer tax is calculated as a percentage of the final selling price or the home's assessed value. The percentage charged can also vary by county within a state, or be influenced by population level and other factors.
Because these taxes vary on a state, regional and local level, it's important that buyers and sellers work with an experienced real estate agent to ensure they understand what they'll be charged and who will pay the tax when buying or selling a property.
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Who Pays Transfer Taxes in Washington, D.C.: the Buyer or the Seller?
In Washington, D.C., the tax is split between the buyer and the seller. The seller pays the recordation tax, and the buyer pays the transfer tax. The fee isn't paid out of hand, but rather rolled into a mortgage or deducted from the home seller's profit.
Your real estate agent should be able to answer any questions about the tax, and they also may suggest using it during negotiations to trade off for something you'd rather the buyer pay.
How Much Are Transfer Taxes in Washington, D.C.?
Washington, D.C.'s real property transfer tax is 1.1% the sale price of homes less than $400,000 and 1.45% on homes over $400,000 per $500 of value over $100. Note that this is the rate for transfers of residential property; commercial and other forms of real estate are charged different rates.
There are exemptions to the real estate transfer tax in Washington, D.C. If the property's ownership is being transferred due to a divorce, no tax is charged. First-time home buyers can receive a tax abatement of the entire transfer tax if buying a home for less than $332,000.
While the transfer tax is usually split in Washington, D.C., the buyer can ask the seller to pay it all, or vice versa. This could be an item that your realtor can negotiate for you.
Can You Deduct Transfer Taxes?
The federal government doesn't allow you to deduct transfer taxes on your federal tax return. You can, however, use them to offset any gain on sale.
A home sale's profits are only subject to capital gains if the profit is above $250,000 for an individual or $500,000 for a family. The tax is charged on the profit from the sale, or the difference between what you paid for an asset and what it sold for, rather than on the total selling price.
To offset this gain, include transfer taxes in your property's cost basis. If you're the seller, add it to the property's original cost. If you're the buyer, just remember them when you eventually sell. Tax laws and rules can change, so consult with a tax professional before taxing the offset.
Other Considerations
Selling or buying a home can be subject to a confusing variety of taxes and fees. Most homeowners and buyers lack the expertise to identify and understand them all, which is why an agent is there to help. Who pays which taxes and fees impacts your overall value when buying a new home or your profit when selling.
The real estate transfer tax will appear on your final HUD-1 form. It's just one of many line items on the form that may not make much sense to you. Given the complexity of a real estate transaction, and the amount of money involved, consider partnering with an experienced, local real estate agent to help you navigate the paperwork. Contact Clever today to be connected with an agent in your area.
