Selling your home in California can feel like a bear, with closing costs amounting to as much as 6% to 8% of the total sale price. If you’re a California seller, you may have noticed a chunk of these costs going to transfer taxes. So what are these fees and why are they so expensive?
Transfer taxes are charges levied by various government bodies on the conveyance of homeownership from one party to another. The taxes are proportional to a home’s value, and since your home is likely your most valuable asset, those taxes can add up fast.
Don’t wait till your settlement statement to ask questions. Learn all about transfer taxes in California below.
What are transfer taxes?
The National Association of Realtors defines transfer taxes as “taxes imposed on the transfer of title of real property.” Put simply, when the title of your home — the document that entitles you to legal ownership of that property — is transferred to another party, the government levies a tax on that transfer. Depending on where you live, you’ll need to pay transfer taxes to the state, your county, and/or your city. The purpose of these taxes is just like any other tax: to generate revenue.
Sellers customarily foot the bill
But who pays for transfer taxes might come down to where you live. Though it is most common for the seller to pay the state and county taxes, there are some parts of Northern California where buyers split or pick up the city transfer tax tab. A real estate agent with local experience is best equipped to help you understand which fees you’re on the hook for. These experts might also be able to help you make the most of whatever kind of market you’re in.
If you know you want to pass off transfer tax costs onto the buyer, Rick Fuller, an Antioch real estate agent with over 18 years of experience in real estate, recommends sitting down with your agent and making a plan for a multiple offer environment:
“It’s in multiple offer environments that these negotiations are most effective. When you have multiple buyers bidding on a property, it’s a lot easier to have the buyer pay for costs that may not be customary for them to pay for, like a transfer tax or a cost associated with an HOA transfer fee. These are things that we generally see the seller pay for unless they can create an environment where there are multiple offers, and a buyer is willing to pick up the cost of those items.”
The escrow company that handles your home sale will calculate the taxes and present them to you on your settlement statement. But by the time you’re reading the settlement statement, it’s too late to try and negotiate the fees, so make sure to talk to your agent about transfer taxes before sitting down at the closing table.
Types of transfer taxes
When it comes to transfer taxes, it’s all about location, location, location. According to Fuller, transfer taxes break down at a state, county, and city level, meaning you’ll probably pay something to all three. And on top of that, you may have to pay a neighborhood homeowners association transfer fee.
Each governing body levies transfer taxes and fees at different rates. Here’s a breakdown:
State transfer taxes
State transfer taxes are the only one-size-fits-all tax for home sales in California. The state levies a transfer tax of $0.55 per every $500 of home value. For example, a seller in Tahoe who sells their property for the median home price of $480,000 will pay the same tax rate as a seller in Orange who sells their home for the local median home price of $790,000.
However, note that the common denominator here is the rate, not the amount due. Since taxes are commensurate with home value — assuming our example sellers each had a home of median value — the seller in Orange would end up paying $869 in state transfer taxes as compared to the seller in Tahoe, who would only pay $528.
County transfer taxes
Counties in California can also leverage taxes on title transfers. However, unlike state transfer taxes, county transfer tax rates vary widely across the state.
For example, a couple selling a home in Los Angeles County would pay a county transfer tax of $1.10 per $1,000. Whereas, a couple selling in Napa County would only pay $0.55 per $1,000. If these sellers’ homes were of equal value, the Los Angeles couple would pay double the amount in county transfer tax compared to the couple in Napa.
City transfer taxes
Some cities, too, impose a tax on the transfer of titles. Like county transfer taxes, these rates can differ dramatically city to city and have the most nuance of all tax tiers.
Firstly, there is a difference in rate from city to city. Take the tax rates of Culver City and Pomona as an example. Though these cities are just an hour and 15-minute drive from each other, Culver City has a transfer tax rate of $4.50 per every $1,000 of home value, while Pomona’s rate is just $2.20 per $1,000.
Secondly, some Californian cities impose variable transfer taxes, meaning they leverage taxes at tiered rates based on home value. For example, take a look at how San Francisco divides its tax tiers:
- Homes valued at more than $100 but less than or equal to $250,000 are taxed $2.50 for each $500.
- Homes valued more than $250,000 but less than $1,000,000 are taxed at a rate of $3.40 for each $500;.
- Homes worth $1,000,000 or more but less than $5,000,000 are taxed $3.75 for each $500.
- For homes valued at $10,000,000 or more but less than $25,000,000, a $27.50 tax is levied for each $500.
- And homes worth $25,000,000 or more are taxed at a rate of $30.00 for each $500.
Other transfer fees
The state, city, and county are the only bodies formally able to impose taxes, but Fuller points out that homeowners associations and other neighborhood organizations may charge transfer fees.
“[There’s often] a fee associated with transferring the buyer’s name on to the homeowners association or moving the seller’s off, providing new keys and codes, and fobs to pools and clubhouses,” he explains.
Are transfer taxes deductible?
While you can’t deduct transfer taxes from your income tax return, you can leverage them to lower what you pay in capital gains taxes. For those unfamiliar, the net profit from your home sale (or, put simply, any money you made from selling your home) is considered a “capital gain.” The federal government taxes these capital gains like any other asset sale.
But sellers can count paid transfer taxes as selling expenses and deduct them from the closing price of their home. This deduction can reduce the amount of capital gains taxes sellers pay on any profit made.
Transfer tax exemptions
There are a few instances where you may not owe transfer taxes on your home sale. If you qualify for an exemption, you must list the reason for exemption on the document along with the corresponding code. Some exemptions include:
- Gifts: If a homeowner gifts a property free of debts (like mortgages or liens), it is exempt from transfer taxes.
- Trust Transfers: Homeowners who transfer property into a revocable trust can do so free of tax. However, this exemption does not apply if the property is sold to a trust.
- Court-ordered conveyances: Certain title transfers that are ordered by the court may be exempt from transfer taxes.
- Property value is less than $100: Properties valued at under $100 are exempt from transfer taxes.
Estimating transfer taxes for your home sale
Throw away the scrap paper and use HomeLight’s Net Proceeds Calculator to quickly estimate the proceeds you’ll earn on your home sale. This tool assesses your closing costs like transfer taxes, agent commissions, and home improvements to help you visualize your bottom line.
Another great way to determine your transfer taxes (and other closing costs) before you finalize your home sale is to work with a top real estate agent. Fuller highlights what these local experts can offer you:
“A knowledgeable real estate team that knows the community … can provide the seller with an itemized estimate of their proceeds. That can give a breakdown of the costs that are what we call ‘customary in their community.’”
These customary costs are not necessarily strictly buyer-pay or seller-pay fees. Instead, many are negotiable based on the market. The trick is discussing transfer taxes with your agent early on in the sale so you know whether or not you’d have leverage to negotiate this point.
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