When you are moving, financial paperwork can be one of the biggest headaches. Something which can be confusing for anyone, whether buying or selling, are transfer taxes.
Transfer taxes are levied by states, counties, and municipalities (so yes, you may well have to pay two or three taxes, although in some cases one can be applied to another). There is no federal transfer tax to worry about.
Thus, you have to worry about your state’s transfer tax first of all. In the District of Columbia, there is a deed recordation and deed transfer tax, both of which are 1.1% unless the home is valued above $400,000, in which case it is 1.45%. This means that both the buyer and the seller pay the tax. Given DC’s higher home values, it is relatively rare to pay the lower rate. The recordation tax is reduced to 0.725% for first-time homebuyers. Maryland and Virginia both have considerably lower transfer taxes – Virginia’s, however, are complicated and include a state recordation tax, grantor tax and, in some areas including Northern Virginia, a congestion relief fee, which can give you some idea how crazy the transfer tax situation can get. If DC’s high transfer taxes bother you, note that DC has lower property taxes, so it evens out in the long term. DC also assesses a fee for the paperwork of recording the deed and, if you have a mortgage, your deed of trust. Note that states use different names for the taxes, but generally calculate them in a similar way.
Because the tax is so complicated, a lot of realtors offer the service of handling transfer taxes for their clients. Make sure that your realtor is savvy with the transfer tax (especially if you are moving to a different jurisdiction and could possibly be hit by taxes on both ends) and knows what they are doing. If unsure, you may want to talk to your tax advisor or even your lender; they may have the necessary expertise to give you the advice. Always check the tax rates before buying; the rates in this article are as of February 2018, so there is a chance they will have increased before you buy your home in DC.
Transfer taxes are not deductible but do affect the amount of gain or loss you need to record when selling the home now or in the future. The tax is payable whether you have a mortgage or are fortunate enough to be able to buy your new home cash. So, it is a good idea to work out about how much tax you will have to pay so you can budget for it in the closing costs. In some states, you can negotiate with the other party as to who pays the transfer tax.
Transfer taxes are an unavoidable cost and hassle when selling a home. Talk to your realtor, attorney, or tax advisor to make sure you do the correct paperwork and get everything taken care of. Unfortunately, you are still liable for these taxes even if you are selling a home and taking a loss; they are based on value, not any profit you might have made. If your home is close to the $400,000 cut off then you might be able to save money for both parties by dropping the price slightly below. The tax is based on the sales price; unlike with property taxes, there is no separate assessment unless the property is being transferred for no price or a nominal price (30% of fair market value or less), in which case they will assess fair market value. If you are not sure what to do about transfer taxes, then you need to talk to an advisor or attorney who is experienced in dealing with them in your specific state