Nobody enjoys discovering surprise fees when selling a home.
And anyone who has sold a home can tell you all about sellers’ closing costs, which most commonly include real estate commission fees, loan payoff fees, title transfer taxes, title insurance fees, and attorney fees.
But in some states, home sellers might also need to consider whether they will be responsible for a real estate excise tax.
You might be scratching your head, wondering what this is. So let’s explore what exactly a real estate excise tax is—and who’s on the hook for it.
What Is An Excise Tax In Real Estate?
A real estate excise tax (REET) is a tax on the sale of real property. The tax has different names, depending on the jurisdiction where you’re recording a sale.
In certain areas, real estate excise taxes can also be referred to as a real estate transfer tax, a conveyance fee, a recordation tax, a documentary transfer tax, or a deed transfer tax.
While the transfer fee varies from state to state, it is typically the responsibility of the seller to cover the amount of the tax. But that can also change.
“Depending on the jurisdiction, the tax is sometimes the buyer’s responsibility to pay, and other times it’s the seller’s,” says Sarah Sharp, an acquisition attorney and partner at SK&S Law Group and the director of Acta Consulting LLC, a tax advisory service in Denver. “To correctly plan for the cost of the transaction, buyers and sellers must be informed of their local excise tax rules.”
How Much Is An Excise Tax?
State and local governments levy real estate excise taxes or transfer taxes. And the amount is usually based on a percentage of the sale price or the property’s assessed value at the time of the sale.
“In most circumstances, the state has a unified transfer tax, but in certain states—like Pennsylvania—the amount of the tax changes from town to town, making transfer tax extremely specific to the transaction and somewhat complex,” says Matthew Ricci, a home loan specialist with Churchill Mortgage in Rhode Island.
But in general, real estate transfer tax rates range from .01% (Colorado) to 1.5% (Delaware).
Additionally, in some states, sellers are subject to a state real estate excise tax and a local real estate excise tax. For example, in Washington state, sellers are assessed a state real estate transfer fee of 1.28% plus local taxes.
Excise taxes are assessed as part of the property’s closing costs and must be paid before the deed can be recorded. Therefore, the fees are assessed only once a sale has officially closed.
While sellers are generally responsible for paying the real estate excise tax at the time of the sale, the buyer is ultimately liable for the tax.
Therefore, if sellers fail to pay the tax, buyers will be on the hook for paying it and could eventually face a lien on the newly-acquired property.
Will You Have To Pay A Real Estate Excise Tax?
Whether you’re required to pay a real estate excise tax depends entirely on your state and local regulations around real property transfers and sales.
There are currently 14 states that do not impose a real estate excise fee or real estate transfer tax—Alaska, Arizona, Idaho, Indiana, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Oregon (except Washington County), Texas, Utah, and Wyoming.
And even if you don’t live in those states, you might not have to pay. Many states that levy a transfer tax also provide exceptions or exemptions for which home sellers can apply.
For example, in Ohio, the real property conveyance fee does not apply to the following:
• Gifts from one spouse to another or children and their spouses.
• Sales or transfers to or from a nonprofit agency are exempt from federal income taxation when the transfer is without consideration and furthers the agency’s charitable or public purpose.
When selling your home, the best thing to do is work with a licensed real estate agent or a professional mortgage expert, so you’re aware of all taxes and fees associated with the sale and any exemptions that might apply to you.
What’s The Tax Used For?
Typically, governments use the collected transfer tax fees in various ways, including funding restoration projects, open space conservation efforts, housing programs, public transit initiatives, and schools.
In Seattle, the city put REET fees toward a playground renovation ($200,000) and a park and shoreline restoration project ($600,000).
Proponents of real estate transfer taxes argue that the assessment is necessary for funding state services, while opponents decry transfer taxes as an unjustified tax on home sales.
Courtesy of Realtor.com