What is a transfer tax?
A transfer tax is a tax levied on the transfer of property or title to property from one individual or entity to another. A transfer tax can be imposed by a state, county or municipality. It is generally not deductible from federal or state income tax, although it can be added to the cost base when calculating profit on the sale of securities and investment property. Transfer tax is considered an excise tax in some states.
Key points to remember
- A transfer tax is charged by a state or local government to complete a sale of property from one owner to another.
- The tax is generally based on the value of the property.
- A federal or state inheritance tax or inheritance tax can be considered a type of transfer tax.
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Understanding a transfer tax
A real estate transfer tax may be imposed by state, county, or municipal authorities for the privilege of transferring real estate within jurisdiction. The government effectively enforces the transfer of a legal document, certificate or title from a seller to a buyer. The amount of tax is based on the property’s value and the property’s classification.
The seller is liable for the transfer tax, although it is not uncommon for an agreement to be made for the buyer to pay the tax. Some states require the buyer to pay the tax if the seller does not pay it or is exempt from paying it.
Some states do not impose a transfer tax on real estate. They include Alaska, Arizona, Idaho, Indiana, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Oregon, Texas, Utah and Wyoming.
Transfer tax on inheritance
A transfer tax may also be imposed on the transfer of property by inheritance. This is sometimes called an inheritance tax, especially by opponents of inheritance tax.
A death tax can refer to any gift tax, inheritance tax, or generational transfer tax that is taxed on the value of property inherited after the owner’s death.
Exclusions for inheritance of estates valued at less than millions protect most Americans from inheritance taxes.
In recent years, all but the richest Americans have been protected from these taxes by high tax exemptions at the federal level.
Federal inheritance tax applies to a deceased’s gross estate, which typically includes all of the person’s financial and real estate assets. For taxpayers inheriting in 2021, the exclusion amount is $ 11.7 million ($ 12.06 million for 2022).
There is also a gift tax which applies to transfers of money or property made during a person’s lifetime. Federal tax on gifts ranges from 18% to 40% and applies to the donor, not the recipient, for amounts greater than $ 15,000 for 2021 ($ 16,000 for 2020).
The transfer tax by generation leap
Generation Skip Transfer Tax (TPS) is an additional tax on a transfer of ownership over property that skips a generation. The GST was put in place to prevent families from avoiding inheritance tax for one or more generations by donating or bequeathing them directly to their grandchildren or great-grandchildren rather than their children.
The same exclusions apply to the GST: the transfer must be worth more than $ 11.7 million in 2021 ($ 12.06 million in 2022) for the tax to take effect.
State transfer taxes
Fifteen states and the District of Columbia have either an inheritance tax or an inheritance tax, and one state has both. An inheritance tax is levied on the assets of the deceased, while an inheritance tax is payable by the beneficiary of the assets.