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There are more costs than most people realize when you transfer real estate. Closing costscan be as much as 3% – 5% of your loan amount, and a big part of it can be transfer tax.
Depending on where you live, you could pay several thousand dollars in transfer taxes, yet in some areas, you may pay as little as $50.
Here’s everything you must know about the transfer tax on a mortgage.
What Is a Transfer Tax on a Mortgage?
A transfer tax is a tax your county, city, or state charges when you transfer real estate from one person to another.
You may also hear it called deed transfer tax or stamp tax. Not every state charges one, but it will be a percentage of the sales price if yours does.
The transfer tax is assessed at the closing when money exchanges hands and all fees are handled. The mortgage closer will pay the county, city, or state that charges the taxes the amount appropriate for your sales amount and where you live.
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How Much Are Real Estate Transfer Taxes?
The exact amount of real estate transfer taxes varies by where you live. Some states charge a flat tax, while others charge a percentage based on the sales price.
The average transfer tax is $1 to $3 per $1,000 of the sales price, but some areas add additional transfer taxes on top of the base costs.
Some ‘more popular’ cities tend to charge additional fees to earn more money in exchange for the ‘luxury to live there.’
Depending on where you live, you could pay as little as $50 or as much as several thousand dollars in mortgage transfer tax, so it can make a big difference in your closing costs.
Who Pays for Transfer Taxes? Buyers or Sellers?
Who pays the transfer taxes also depends on where you live. Some states require that only the seller pay the taxes, while others allow the buyers and sellers to split it.
If your state doesn’t determine who pays the tax, you can negotiate the closing cost with the seller, including the agreement in the contract.
For example, if you agree that the seller will cover the cost, put it in the contract, or the seller may deny having agreed to it at the closing.
In states with higher real estate transfer taxes, it makes sense to ask the seller to at least split the cost. Since both the buyer and seller benefit from the sale, it makes sense for both parties to split the cost.
Which States Have No Real Estate Transfer Taxes?
Not every state has transfer taxes. If you live in any of the following states, you don’t have to worry about transfer tax:
- Alaska
- Idaho
- Indiana
- Louisiana
- Kansas
- Mississippi
- Missouri
- Montana
- New Mexico
- North Dakota
- Oregon
- Texas
- Utah
- Wyoming
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Are Transfer Taxes Deductible?
Some taxes are deductible when you buy real estate, such as property taxes. You can write off the amount you pay annually (up to $10,000).
However, real estate transfer taxes aren’t deductible. They are just another part of your closing costs that you can’t deduct.
If you are the buyer, you can include the cost in the cost basis ofbuying the home. Your cost basis isn’t just the price you pay for the home, but also the costs that go into making the purchase happen, like the transfer taxes.
If you are the seller, you can deduct the amount from the total sales price, therefore reducing your capital gains.
If you can’t exclude the entire amount of your profits from the capital gains taxes, the expense could help you lower your tax liability, even though it’s not deductible.
Do You Pay Transfer Taxes When Refinancing a Mortgage?
Since the transfer tax is a tax when you transfer the property from one person to another, you don’t have to pay it when you refinance.
When you refinance your mortgage, you only pay off your existing mortgage with a new one. You aren’t transferring any property, so the city, county, or state doesn’t tax you.
Bottom Line: What Is a Transfer Tax?
The transfer tax isn’t something you can get around if your state, county, or city charges it. You may be able to negotiate with the buyer or seller (depending on who you are), to split it or even have it covered for you, but someone must pay it for the property to transfer.
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