What are Transfer Taxes?

When it comes to buying or selling property, businesses, or even receiving gifts, it’s important to understand the various taxes that might apply to those transactions. One of these is transfer taxes, which can often catch people by surprise if they aren’t prepared. Keep reading to find out what transfer taxes are, how they work, and how they may affect you in real estate or business dealings.

What is a Transfer Tax?

A transfer tax is a levy imposed by a government on the sale or transfer of assets such as real estate, stocks, or businesses. The tax is generally paid when ownership of an asset is moved from one party to another. The reason these taxes exist is to generate revenue for local, state, or national governments, and they vary depending on the type of transfer and jurisdiction. In some states, transfer taxes may be classified as an excise tax, highlighting the relationship between the two and indicating how they can be treated similarly for tax purposes.

How Transfer Taxes Work

Transfer taxes are a type of tax levied on the change of ownership or title to property from one individual or entity to another. These taxes are typically imposed by state, county, or municipal governments and are based on the property’s value and classification. In real estate transactions, the seller is usually liable for the real estate transfer tax, although it’s not uncommon for the buyer to agree to pay this tax as part of the negotiation process.

When it comes to real estate transactions, transfer taxes are generally paid as part of the closing costs. The tax rate can vary significantly depending on the state and locality, ranging from a few cents to several dollars per $100 of the property’s value. For instance, in New York City, the real estate transfer tax rate is 1.425% of the sale price for properties valued over $500,000. While in Florida, the documentary stamp tax rate is $0.70 per $100 of consideration.

Transfer taxes also apply to inheritances, where the recipient of the inherited property is responsible for paying the tax. However, there are instances where the tax may be waived or reduced, such as when the property is given to a family member or if it is used for a specific purpose, like a primary residence. Understanding these nuances can help you better prepare for the financial implications of property transfers.

Types of Transfer Taxes

There are several types of transfer taxes, each specific to certain types of transactions. Below are the most common:

Real Estate Transfer Taxes

Real estate transfer taxes are levies imposed on the transfer of ownership or title of real property from one party to another. These taxes are typically calculated as a percentage of the property’s sale price or its assessed value, and they can vary widely by jurisdiction. In some areas, additional taxes may be applied if the property’s value exceeds certain thresholds. Real estate transfer taxes are a crucial component of closing costs in property transactions, often paid by the seller, though this can be negotiated with the buyer. States like New York have some of the highest transfer tax rates, while others, such as Texas, do not impose state-level transfer taxes at all. Understanding these taxes can help buyers and sellers effectively plan for the financial aspects of real estate transactions.

Inheritance Taxes

The inheritance tax is a levy imposed on the transfer of assets from a deceased person to their beneficiaries. This tax is typically paid by the recipient of the inheritance, though the estate itself may be responsible in certain cases. The amount of tax owed can vary widely depending on the relationship between the deceased and the beneficiary, as well as the value of the inherited assets.

In addition to the inheritance tax, the gift tax is another type of transfer tax that applies to the transfer of property or money between living individuals. The gift tax is imposed on the giver of the gift, and like the inheritance tax, it has an exclusion amount. For 2025, the annual gift tax exclusion is $19,000 per recipient, meaning gifts below this amount are not subject to tax. However, if the total value of gifts given by an individual exceeds the lifetime exclusion amount, which aligns with the estate tax exclusion of $13.99 million, the excess may be taxable.

Generation-Skipping Transfer Tax

The Generation-Skipping Transfer Tax (GSTT) is imposed on transfers of property that skip a generation, such as when a grandparent leaves assets directly to a grandchild, bypassing the parent. This tax is designed to ensure that estate taxes are paid at each generational level. The GSTT is in addition to any estate or gift taxes that may apply, and it is typically imposed at a flat rate equal to the highest estate tax rate. This tax can have significant implications for estate planning, and careful structuring is often required to minimize its impact. Understanding how the GSTT works is essential for those looking to transfer wealth across multiple generations.

Stock and Business Transfers

In addition to real estate, transfer taxes can also apply to the sale or transfer of stocks, bonds, and even business ownership. When a limited liability company (LLC) is involved in property transfers, specific information about the members and management must be provided. In these cases, the tax may be a percentage of the total value of the business or the stocks sold, or it could be structured differently depending on the asset type. Documentation is also required for any other business entity that holds membership in the LLC to ensure transparency in ownership.

File Your Taxes Today

How Transfer Taxes Are Calculated

Transfer taxes are typically calculated as a percentage of the asset’s value at the time of transfer. However, the exact calculation method varies depending on the jurisdiction and type of asset being transferred. In real estate transactions, the fair market value of a property is often used to calculate the transfer tax, especially when other financial considerations, such as mortgages, are involved. For example, if you’re buying a home worth $500,000 in a state with a 1% transfer tax, your tax would be $5,000.

If stocks are being sold, transfer taxes are usually calculated based on the value of the stocks being transferred. For example, if you’re moving $100,000 worth of stock, the tax may be a small percentage of that amount.

These rates and methods can vary significantly depending on the region, so it’s important to check local tax laws or consult with a tax professional.

Who Pays Transfer Taxes?

In many cases, the buyer or recipient is responsible for paying transfer taxes, but the party who pays can vary by the type of transaction or region.

Real Estate Transactions

Usually the buyer pays the real estate transfer tax, but this can be negotiated or even passed to the seller in some areas. For instance, in some jurisdictions, the seller may pay part of the tax as part of the closing costs. It’s important to verify this before completing a transaction.

Inheritance and Gifts

For inheritance or gift transfers, the person receiving the assets (the heir or gift recipient) is generally responsible for paying the tax. However, tax laws around inheritances and gifts vary by jurisdiction and can depend on the value of the asset and the relationship between the parties involved.

Common Exemptions and Deductions

There are several situations where exemptions or deductions may apply. These can significantly reduce or even eliminate the tax burden.

Real Estate: In some cases, exemptions may apply for first-time homebuyers, certain types of property (e.g., agricultural land), or for transfers between family members.
Gifts and Inheritances: Certain amounts of gifts and inheritances may be exempt from taxes, such as the annual gift exclusion or the estate tax exemption.
Government Transfers: Property to or from government entities may be exempt.

How Transfer Taxes Vary by Location

Tax rates and rules can vary dramatically depending on where the transaction takes place. In the U.S., each state has its own set of laws regarding real estate transfer taxes, and even within a state, different cities or counties may impose additional taxes. States like New York, Connecticut, and New Jersey impose relatively high taxes. Meanwhile there are several states that do not impose a real estate transfer tax at all. They are:

Alaska
Colorado
Idaho
Indiana
Kansas
Louisiana
Mississippi
Missouri
Montana
New Mexico
Oregon (most counties)
Texas
Utah
Wyoming

Transfer Taxes in Real Estate Transactions

When buying or selling a home, transfer taxes are an important part of the transaction process. They’re typically part of the closing costs, and while these taxes are often small compared to the total sale price, they can add up quickly, especially for high-value properties. Suppose you’re selling a home for $300,000 in a state with a 1% tax rate. That means an additional $3,000 in taxes could be due at closing, which may impact your overall budget.

Impact of Transfer Taxes on Buyers and Sellers

Transfer taxes can influence both buyers and sellers in different ways. For buyers, these taxes add an additional expense to the home purchase, which may affect the total amount of money they need at closing. Sellers, on the other hand, may need to factor these taxes into their negotiation strategy.

If you’re planning a real estate transaction, understanding these taxes and factoring them into your budget will help you avoid surprises.

Conclusion

Transfer taxes are a common part of many transactions, but they vary widely depending on the type of asset and your location. Whether you’re buying a home, receiving an inheritance, or selling a business, understanding these taxes are essential for ensuring you’re prepared for the costs involved.