Property transfer tax, sometimes referred to as “deed tax”, “stamp tax”, “mortgage registry tax” or even a “capital gains tax,” has been in existence in the United States for several decades now. Simply put, it refers to a once-off fee that local governments charge when there has been a change in property ownership within its jurisdiction. Some states, however, such as Wyoming, Mississippi, New Mexico, North Dakota and Missouri do not require their residents to pay this tax when transferring the ownership of real estate from one owner to another.
Just like the various other types of taxes that exist, a property transfer tax is compulsory and any attempt to illegally avoid paying it will very likely be met with various consequences ranging from huge fines to jail time, or both. While you are legally obliged to pay a tax on the transfer of any property, there are also legal and even ethical ways that you can either reduce or ‘avoid’ paying a transfer tax. Having said that, it is important to state that this “avoidance” that was previously mentioned, is in actual fact more of a deferment than an actual avoidance.
How to Avoid or Reduce Your Property Transfer Tax
A property transfer tax is calculated as a percentage of the market value of the property that is changing ownership. Typically, it is the mandate of the seller to ensure that the real estate transfer tax is paid, however, there are instances where the seller might be exempt and it will fall on the buyer to settle the transfer tax. With various property taxes contributing a large chunk of the revenue of local governments, it is not too difficult to understand why they go all out to ensure effective and efficient collection.
Here are 5 ways or techniques that once can use to reduce or defer the payment of this tax.
1. No transfer state: You can avoid paying property transfer tax if you transfer property ownership in a state where transfer tax does not exist. Do your research and consider purchasing property within such areas. Look up places such as New Mexico, Mississippi, Missouri and others mentioned on local government websites. By opting to buy real estate in these areas, you are able to save on transfer tax fees and be able to use the savings for other things. Be sure that the logistics will work for you so that you get the most out of your investment.
2. Primary residence designation: You can designate the property you are selling as your primary place of residence, which would automatically allow you to exclude as much as $250,000 (or $500,000 for a married couple) of the capital gains of the sale, from the capital gains tax.
3. 1031 Property Exchange: If the proceeds earned from the sale of an investment or rental property is reinvested into the purchase of another similar property type within a 180-day period, then the capital gains tax that would otherwise have been paid on the sale of the first property would otherwise be avoided or deferred. This is what is known as a 1031 property like-kind property exchange.
4. Transfer to charity: Charities don’t pay capital gains tax, therefore, any property that is donated or transferred to them would be exempt from a tax.
5. Home renovation expenses: Most expenses that are undertaken to renovate a house can usually be deducted from the capital gains that is to be paid after the sale of the property. This is especially so if the property in question is the primary residence of the seller.
6. Transfer it in a Will: This method will probably only apply to states that don’t have an inheritance tax.
If you live in the New York City area for instance, you can avoid paying real estate transfer tax if you managed to come into an inheritance. While it is not necessarily the most pleasant circumstances to acquire property, it helps to know that you can change ownership of property without being liable for the transfer tax. Inherited property is exempt from paying property transfer tax only if it is being passed on to the intended beneficiaries and not being sold. In such circumstances, the advice of a New York real estate attorney will be very invaluable and helpful.
Depending on which side you fall under in the property transfer process, you need to establish who is going to pay for the transfer tax. If you are the seller, you need to check if you are eligible for any exemptions or deductions so that you can minimize, as much as possible your tax liability. The rates of these deductions and exemptions will often vary from state to state, so it will usually be up to you to determine if you are eligible and how much you stand to be exempted for. If you are engaging the services of a real estate agent, then it would be their responsibility to do this research and provide you with this information.
While most property owners would like to avoid paying property transfer taxes, the reality is that this is not always possible. In such a scenario, the next best option is to significantly reduce the amount of transfer tax that you have to pay when purchasing your home. A great way to do this is to opt for real estate that falls in the lower transfer tax threshold. Since transfer tax is calculated as a percentage of the market value of the property, it is safe to say that the more expensive the property is, the more transfer tax you have to pay and the opposite is true.
Also, it is important that you seek the advice of a real estate attorney when tackling issues revolving around transfer taxes. They are highly specialized when it comes to the property industry and have a wealth of information and can be a source of great in helping you in the property transfer process. Additionally. whatever legal question you may have, they are able to respond to it and guide you through the decision process. By providing insight into the implications of a property deal, you can significantly reduce your transfer tax.
Conclusion
At the end of the day, the buying and selling of real estate is a big deal and the costs involved tend to add up. By ensuring that you are avoiding and significantly reducing costs such as transfer tax, you are able to lessen your financial tax burden and able to tackle other expenses that come with buying your property.
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