The Detroit Post
Sunday, 05 December, 2021

Are Real Estate Transfer Taxes Deductible

Danielle Fletcher
• Monday, 16 November, 2020
• 8 min read

Although savvy investors try to make more money than they lose when selling a property, there are several expenses that come into play during the transaction. When a property is sold, the real estate title is transferred from the seller to the buyer.



Depending on where you buy or sell a home, you might have to pay taxes at the city, county, and/or state level. To take that one step further, if you receive property as a gift or inheritance, you may have to pay taxes at the federal level.

The county government decides whether they want to charge this optional transfer tax. If you buy a real estate investment or rental home, the transfer taxes can be deducted as a work expense.

On the flip side, if you buy a primary residence, the transfer tax cannot be deducted. Add the cost of transfer taxes, title insurance, and any improvements you've made to the home, such as putting in new windows, renovating the bathrooms, or adding new appliances.

When a home closes, the seller typically needs to pay capital gains tax. To determine the capital gains tax on your property, subtract your cost basis from the home's sale price.

If you're married and file separate tax returns, your loss is limited to $1,500. Most states assess capital gains tax on the difference between your cost basis and what you sell the home for.

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This means you'll pay less in capital gains tax when the property is sold. If you file jointly as a married couple, you need to pay taxes on gains that exceed $500,000.

If you file as single, however, you'd pay capital gains tax on $50,000 (the $300,000 profit from the sale of the house minus your $250,000 cost basis). If you spent $10,000 in transfer taxes when you initially purchased the $400,000 property, that amount is applied to your home's cost basis.

Because you spent $10,000 in transfer taxes, you won't be taxed as heavily on capital gains, saving you money in the long run. It varies based on the real estate market and the state where the transaction takes place.

Transfer tax varies by state, but it's typically a percentage of the sale price or market value of the home. Most state laws make transfer tax a set rate for every $500 of the property value.

To give you an idea of the range in transfer taxes, here's a breakdown of transfer tax rates in a few states. State Transfer Who Pays the Tax? California$0.55 per $500Variable, but typically paid by the sellerFloridaHome's sale price/$100 x .70Variable, but typically paid by the seller Morphemes below $3M: 0.4% Homes above $3M: 0.65%Variable, but typically paid by the seller North Carolina $1 per $500Variable, but typically paid by the seller Colorado 1–2%, depending on which part of Colorado you're untypically split between the buyer and seller Pennsylvania 2% of the home's sale presplit 50/50 between buyer and seller Depending on the state, realestatetransfertaxes may not apply if you're a first-time homebuyer.

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When selling a home, some states or counties might also charge a recording fee. Similar to transfer taxes, mortgage recording taxes are a percentage of the sales price.

As a buyer or seller, it's important to understand the costs of a real estate transaction. It's also important to include who's paying the transfer tax in the sales contract.

Failing to do so may mean you'll pay far more than you originally bargained for when selling a home. These benefits weren't enough for Uncle Sam, though, as a new tax loophole now allows those prudent investors who act today to lock in decades of tax-free returns.

Depending on where you live, they can be easy to manage or a huge financial burden. Local governments collect these taxes to help fund projects and services that benefit the entire community, such as schools, libraries, emergency services, and road construction.

Realestatetaxes -- or property taxes, as they're commonly called -- are based on the assessed value of your land and any buildings on it. SALT Deduction Somewhat It Show to Find Property taxesRealestatetaxes you paid on property you owned that wasn't for a business, including • primary residences, • vacation homes, • co-op apartments, • and land.• Check Box 10 on IRS Form 1098 from your mortgage company.

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Charges that show up on your property tax bill for non-tax items like trash collection, assessments for local benefits (such as building a sidewalk in front of your house), and fees to satisfy a fine you owe. Social Security, Medicare, federal unemployment (FTA), and railroad retirement (Rita) taxes.

Some state and local taxes, including taxes on gasoline, car inspection fees, assessments for sidewalks or other improvements to your property, and license fees (e.g., marriage, driver's, and pet licenses). The Tax Cuts and Jobs Act nearly doubled the standard deduction.

For 2019, you can deduct up to $10,000 ($5,000 for married filing separately) of combined property, income, and sales taxes. Mortgage interest, medical and dental expenses, charitable contributions, and casualty and theft losses.

The deduction applies to mortgages you used to buy, build, or substantially improve a home (this is called acquisition debt). After Dec. 15, 2017: You can deduct the interest you pay on the first $750,000 ($375,000 if married filing separately) of qualified mortgage debt on a first and/or second home.

Before Dec. 16, 2017: You can deduct the interest on the first $1 million ($500,000 if married filing separately) of mortgage debt. For 2019, you can deduct reimbursed medical and dental expenses that exceed 10% of your adjusted gross income.

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Medical appliances such as glasses, contacts, hearing aids, and dentures. Any expense that you've been reimbursed for (for example, if your insurance or employer covers the costs).

Say your adjusted gross income (AGI) is $50,000 and you have $8,000 of reimbursed medical expenses. Multiply your AGI by 10% to find the part of your medical expenses that aren’t deductible.

If you itemize, you can deduct contributions or gifts you make “to organizations that are religious, charitable, educational, scientific, or literary in purpose.” Also, you can deduct the money you gave to organizations that work to prevent cruelty to children or animals.

If you donate assets (stocks, for example), they can have a fair market value of up to 30% of your AGI. Your contributions can be in cash, property, or out-of-pocket expenses you incur to volunteer for an eligible organization.

For example, if you drove to and from a non-profit to help with an event, you can deduct the actual cost of gas or $0.14 per mile (your choice). Before you claim a deduction, make sure the organization is a 501(c)(3) public charity or private foundation.

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Also, be sure you can substantiate the value of the deduction, whether it's with a tax receipt from the charity or a qualified appraisal (for non-cash donations). Use Schedule A to claim the deduction, and attach Form 8283 if you made any gift over $500.

Droughts, earthquakes, explosions, fires, floods, high water, hurricanes, landslides, mudslides, snowstorms, storms, tidal waves, tornadoes, volcanic eruptions, and wind-driven water. In general, you can deduct losses that exceed 10% of your adjusted gross income.

Calculate any casualty and theft losses on Form 4684, and then enter the amount on Schedule A. Begin by finding your tax records for the realestatetaxes you paid as well as the receipts for any cars, RVs, or boats you bought during the year.

Next, gather your W-2s and 1099s to determine how much you paid in state and local income taxes. Take a close look at your records to make sure you're not trying to deduct something the IRS doesn't allow (such as the trash collection part of your property tax bill).

Once you've organized your tax records and receipts, think about any other deductions you may be able to take, including the ones for mortgage interest, medical and dental expenses, charitable contributions, and casualty and theft losses. Determine the percentage of the year that you owned the property, and then multiply that by the annual tax bill.

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You can use an app or an online calculator to figure out how many days into the year a date is. The tax is levied as a percentage of the sale price or appraised value of the property.

Depending on where you live, you could be on the hook for taxes at the city, county, and state level. And if you inherited -- or were otherwise gifted -- property, you may owe federal transfer tax as well.

As part of the negotiation process, the buyer and seller work out who pays the transfer tax. And in a few markets, the buyer and seller each pay their own transfer taxes.

Still, the IRS allows you to include them in the cost basis of the property if you paid them as the buyer. And if you're the seller and paid them, you can include them as a sale expense, which can help lower your capital gain.

Of course, other expenses can also help reduce your capital gain, including: The Tax Cuts and Jobs Act almost doubled the standard deduction for every filing status.

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However, itemizing can make sense if you have the right combination of deductions, including the one for property taxes. DeductionLimitProperty and state and local income or sales taxes Up to $10,000 ($5,000 married filing separately)Mortgage interest interest you pay on the first $750,000 of mortgage debt ($375,000 married filing separately) if you took out a mortgage after Dec. 15, 2017Medical and dental expensesQualified medical expenses that exceed 10% of your adjusted gross incomeCharitable contributionsDonations can equal 60% of your adjusted gross income or 30% if you donate assets (e.g., stocks)Casualty and theft losses In general, you can deduct losses that exceed 10% of your adjusted gross income, but they must be the result of a federally declared disaster laws are complicated, and they change periodically.

It's always a good idea to reach out to a trusted tax professional or CPA. They can work with you to ensure you’re getting the most favorable tax treatment possible, no matter what deductions you claim.

Investing in real estate has always been one of the most effective paths to financial independence. These benefits weren't enough for Uncle Sam, though, as a new tax loophole now allows those prudent investors who act today to lock in decades of tax-free returns.

We've put together a comprehensive tax guide that details how you can benefit from this once-in-a-generation investment opportunity.

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