What is a Transfer Tax?
A transfer tax is a charge levied on the transfer of ownership or title to property from one individual or entity to another. A transfer tax may be imposed by a state, county, or municipality. It is usually not deductible from federal or state income taxes, although it may be added to the cost basis when profit on the sale of securities and investment property is calculated. Transfer tax is considered an excise tax in some states.
Key Highlights
- A transfer tax is charged by a state or local government to complete a sale of property from one owner to another.
- The tax is typically based on the value of the property.
- A federal or state inheritance tax or estate tax may be considered a type of transfer tax.
Dive Deep into Transfer Taxes on Real Estate
A transfer tax on real estate may be imposed by state, county, or municipal authorities for the privilege of transferring real property within the jurisdiction. The government is effectively taxing the transfer of a legal deed, certificate, or title from a seller to a buyer. The amount of the tax is based on the property value and the property classification.
The seller is liable for the real estate transfer tax, although it is not uncommon for an agreement to be reached for the buyer to pay the tax. Some states require that the buyer pay the tax if the seller does not pay it or is exempt from paying it.
Some states do not impose a transfer tax on real estate, such as Alaska, Arizona, Idaho, Indiana, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Texas, Utah, and Wyoming.
Decoding Transfer Taxes on Inheritances
A transfer tax may also be imposed on the transfer of property by inheritance. This is sometimes called a death tax, particularly by opponents of inheritance taxes.
A death tax may refer to any gift tax, estate tax, or generation-skipping transfer tax that is imposed on the value of property inherited after the death of the owner.
In 2023, exclusions for estates worth less than $12.92 million protect most Americans from owing estate taxes. In 2024, the maximum increases to $13.61 million.
In recent years, all but the wealthiest Americans have been protected from these taxes by high dollar-amount exemptions at the federal level.
The federal estate tax applies to a decedent’s gross estate, which generally includes all of the person’s financial and real assets. For taxpayers inheriting in 2023, the exclusion amount is $12.92 million ($13.61 million for 2024).
There is also a gift tax that applies to transfers of money or property made while a person is living. The federal gift tax range applies to the giver of a gift, not the recipient, for amounts above $17,000 for 2023 and $18,000 for 2024.
Generation-Skipping Transfer Tax Unveiled
The generation-skipping transfer (GST) tax is an additional tax on a transfer of title to a property that skips a generation. The GST tax was implemented to prevent families from avoiding the estate tax for one or more generations by making their gifts or bequests directly to their grandchildren or great-grandchildren rather than to their children.
The same exclusions apply to the GST: The transfer must be worth more than $12.92 million in 2023 ($13.61 million in 2024) for the tax to kick in.
Spotlight on State Transfer Taxes
Sixteen states and the District of Columbia have either an estate tax or an inheritance tax, and one state—Maryland—has both. An estate tax is levied against the assets of the deceased, while an inheritance tax is owed by the recipient of the assets.
Who Pays the Transfer Tax?
The party responsible for paying the transfer tax is often the seller, in the case of real estate transfers, but not always; in some states, the responsibility is split equally, and in others, there is no real estate transfer tax at all. For inheritances, the tax is paid by the recipient. For estate taxes, it’s paid by the estate of the deceased.
What Are Other Names for a Transfer Tax?
In real estate, the transfer tax may also be known as the stamp tax, deed tax, mortgage registration tax, documentary transfer tax, or recordation tax.
How Do I Calculate the Transfer Tax?
To calculate the transfer tax, you’ll first need to know the tax rate in your state or local municipality, then work the math. You may see the tax expressed as a percentage, or as a dollar amount.
For a simple 1% tax, for example, you’d multiply the value of the property by 0.01% to find the tax. For a tax that is listed as, say, $1 for every $1,000 in value, you’d divide the property value by $1,000 (1,000 x 1 = 1,000). Likewise, if the tax was $1.50 for every $1,000 in value, you’d multiply 1,000 x 1.5 to get 1,500, then divide the property value by 1,500. If you need help, there are online tax calculators you can use to estimate the transfer tax as well.
The Bottom Line
Paying transfer taxes is a typically unavoidable aspect of transferring an estate or real property from one person to another. When a government charges a transfer tax on an inheritance, it’s considered an inheritance tax, but at the federal level it only applies to estates worth more than $12.92 million in 2023 ($13.61 million in 2024).
Related Terms: Excise Tax, Gift Tax, Documentary Tax, Recordation Tax.
References
- Lincoln Institute of Land Policy. “Real Estate Transfer Charges”, Select All States, Year: 2021.
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2024”.
- Cornell Law School, Legal Information Institute. “Generation-Skipping Transfer Tax”.
- Tax Foundation. “Does Your State Have an Estate or Inheritance Tax?”
