What Buyers and Sellers Should Know About Transfer Taxes

It seems as though there’s a tax for just about everything. And when it comes to buying and selling real estate, taxes are certainly part of the process.

One of the tax types that buyers and sellers should be aware of is the “transfer tax.” This tax is charged by California state and local governments whenever a property transfer occurs, regardless of whether it’s residential or commercial. When title of a property is transferred from one party to another, a transfer tax is charged.

The transfer tax varies by location of the subject property and is calculated on the final sale price of a home. Its calculation may differ from one county to the next based on how much each location levies.

Who Pays Transfer Taxes?

Both buyers and sellers will obviously want to know who is responsible for paying these taxes. Generally speaking, it’s the seller who is responsible for paying transfer taxes when a property transfers hands in California. That said, some jurisdictions have changed the rules surrounding transfer taxes, so the answer will depend on the specific purchase and sale agreement.

In some cases, the buyer will be responsible for paying, while in other situations, both buyers and sellers have their role in covering this cost.

Without understanding what these taxes are and how they’re factored into a real estate contract, buyers could be completely unaware that they may be paying transfer taxes, even though it is assumed that the seller will flip the bill. Since these taxes can be included in the overall cost of closing, it’s possible for buyers to be in the dark about their obligation to cover the cost of these fees.

Payment for transfer taxes can be a negotiating factor in a real estate deal between buyers and sellers. Usually, such negotiations can come up in a strong market that favors either buyers or sellers.

In a seller’s market, for instance, the seller is in the driver’s seat and has more negotiating power, especially when a bidding war ensues. In a buyer’s market, on the other hand, buyers have the upper hand and will likely not be open to assuming responsibility for paying the transfer taxes. And if the market is rather neutral, the negotiation can go either way.

How Are Transfer Taxes Calculated?

The exact calculation of transfer taxes will depend on where the property is located, as mentioned above. That means the amount that is paid by a buyer or seller in one city may be slightly different than what is paid in another, though the differences are usually marginal.

The calculations are made based on a percentage value of the subject property’s sale price, though in some cases it may be a flat charge, such as $10 for every $1,000 sold. In many cases, the tax calculation is split between the city and the county tax rate.

For instance, the transfer tax rate in San Diego is currently $0.55 per $1,000 for both city and county transfer rates. At that tax rate, a home purchase of $500,000 would require a transfer tax payment of $5,500 ($0.55 per $1,000 = $2,750 x 2 for each tax bracket).

In some areas where the transfer tax doesn’t include the county’s tax, then the total charge would be lower. It’s important for all sellers and buyers to find out exactly what the transfer tax rate is in their particular area in order to determine how much this additional cost will be.

Does Every Real Estate Transaction Require Transfer Taxes to Be Paid?

When it comes to transfer taxes in California, certain exemptions may apply. Here are just a few situations where the transfer tax may not have to be paid:

  • Transfer for reason of divorce
  • Transfer for reason of foreclosure
  • A court-ordered transfer
  • A gift of title
  • Change of legal name on title
  • Transfer into or out of a trust
  • Changing a legal name 
  • Separating a home between spouses
  • A return of collateral
  • Establishing liens

Local jurisdictions can also have their own set of exemptions that they may allow, which is another reason why it’s important for sellers and buyers to look into their local government regulations regarding transfer taxes.

The Bottom Line

When budgeting for the purchase or sale of a home, it’s important to factor transfer taxes into the mix. And while sellers are typically required to cover this cost, it’s not uncommon for buyers to be burdened by this expense.

For this reason, it’s important for both buyers and sellers to determine exactly who is paying the transfer taxes in a real estate transaction and what this cost will amount to. Speak with your local government office to find out the exact tax rate in your area and consult with your real estate agent to verify how transfer taxes will be included in the negotiations.