When real estate is bought or sold using public records, a tax known as a documented transfer tax is levied. This tax may be imposed on real estate transactions within a county's, city's, or municipality's authority by any of those entities. For instance, the California Documentary Transfer Charge Act provides a tax of $0.55 per $500 of property worth or consideration. This tax is imposed on the transfer of property. If a buyer in Sacramento were to acquire a house with a value of $300,000, the buyer would be subject to a documented transfer tax of $330, equivalent to $1.10 for every $1,000 in value.
In addition, cities can levy fees for documentation stamps; the amount in Sacramento is $2.75 for each $1,000 worth of consideration. As a result, a purchaser would owe $825 to the city of Sacramento in addition to the transfer tax charge of $330 to the state of California, bringing the total tax obligation up to $1,155.
How a Documentary Transfer Tax Works
The tax office of the municipality, county, or state where the property was sold records the transaction and stamps the deed with the amount paid for the property. Because the fee is either stamped or implanted on the face of each publicly recorded deed, the tax is referred to as the "documentary stamp tax." On the closing statement, the tax could be stated in two different ways: as a credit or a debit. It can also be packaged with other expenses, making it more challenging to determine who is paying for it. Transfers made as part of an interspousal transfer deed, transfers between family members, and transfers made as part of an estate. In the circumstances described below, a documented transfer tax is not collected when the deeds are submitted for recording as a public record.
Do I Need to Pay a Documentary Transfer Tax?
The seller usually is responsible for paying the county transfer tax, whereas the buyer and seller typically split the cost of the municipal transfer tax evenly. However, the responsibility for paying the documented transfer tax may fall on either the seller or the buyer of the property. Each jurisdiction has local requirements when establishing which party is responsible for paying it. Because it drives up the property's cost base, the tax is considered a perk for purchasers. If any capital gains taxes are to be paid after selling the house, this adjustment may help minimize those taxes. On the closing statement, the tax could be stated in two different ways: as a credit or a debit. It is also possible to be packaged with other expenses, making it difficult to determine who is paying for what.
Thirteen of the fifty states that make up the United States do not have any tax on documents called documented transfer taxes. Some of the states that levy transfer taxes have legislation regarding such taxes that are far more convoluted than those of other states. For example, Alabama levies a tax of $0.15 per $100, but Delaware imposes a tax of 3% when the property value is at least $100. Delaware's five counties and municipalities can levy a tax of up to 1.5%, which brings the total tax burden for the state down to 2.5%. In Delaware, first-time homebuyers are subject to an additional tax of 0.5% on the first $400,000 of the property's value; however, the county in which the property is acquired has the option to waive this tax.
The Generation-Skipping Transfer Tax
The generation-skipping transfer tax, sometimes known as the GST tax, is an extra tax that must be paid when the title to a piece of property is passed down from one generation to the next. It was decided to institute the goods and services tax (GST) to stop families from evading the estate tax for one or more generations by giving their. This strategy is known as "generation-skipping." The same exceptions are made for the goods and services tax (GST): the value of the transfer must be more than $11.7 million in 2021 and 12.06 million in 2022 for the tax to become applicable.
State Transfer Taxes
One state has both an estate tax and an inheritance tax, making the total number of jurisdictions that impose one or the other to be sixteen, including the District of Columbia. The assets of the dead are subject to a tax known as an estate tax, while the person who inherits those assets is responsible for paying an inheritance tax.