Understanding the Chicago Transfer Tax: A Quick Guide
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Joseph Gordon Associate EditorJoseph Gordon is an Associate Editor with HomeLight. He has seven years of experience reporting on the commercial real estate and insurance industries. He holds an MFA in Creative Writing from the University of San Francisco.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
Selling your home in Chicago can be tricky, but one thing you might not have considered is the real estate transfer tax. These taxes are assessed whenever a property changes hands, acting as a charge for transferring the property title from the seller to the buyer. These taxes can affect your bottom line, so it’s important to have a strong understanding of what you might pay in your market.
Our guide will cover how transfer taxes work in Chicago, detailing what sellers can expect to pay when parting with their property and what exemptions might exist.
From state and county taxes to city-specific levies, we’ll cover how the Chicago transfer tax works and how to estimate these costs for your home sale.
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Even rockstar agents can’t make your tax liability disappear, but HomeLight data shows that the top 5% of agents across the U.S. help clients sell their home for as much as 10% more than the average real estate agent, helping offset the tax bill.
What are transfer taxes?
Real estate transfer taxes are levied by state or local governments when the ownership of a property shifts from one party to another. This taxation occurs at the moment the property’s title, which is the official document proving ownership, is handed over to a new owner.
Like other markets, the Chicago transfer tax concept is simple: it’s a fee imposed by the government to transfer real estate within its jurisdiction. The amount owed in transfer taxes can vary significantly, depending on the property’s location, as different states, counties, and cities may have their own rates and regulations regarding these taxes.
The primary purpose of these taxes is to generate revenue for the state or municipality where the tax is levied. Whether for a state, county, or city, transfer taxes contribute to public services and infrastructure funding.
Who pays for transfer taxes?
In the Windy City, the Chicago transfer tax is the responsibility of both the buyer and seller. However, this financial burden can fall solely on the seller in some Illinois communities. It can vary depending on your local market.
For example, in Aurora, sellers are required to pay a transfer tax levied at a rate of $3 per for $1,000 in the transaction, according to Illinois Realtors. This would mean that on a home that closed at $200,000, a $600 fee would be added to the closing costs.
What are the types of transfer taxes?
Transfer taxes in Chicago work similarly to many other jurisdictions, incorporating state, city, and county levels. Each layer has its own set of rates and rules.
At the state level, Illinois imposes a transfer tax on the sale of real estate. In addition to this, counties can levy their own transfer tax; Cook County, for example, has its own tax for properties changing hands within its borders. Chicago also imposes its own transfer tax.
According to Chicago’s Department of Finance, the real estate transfer tax (RETT) is calculated at $5.25 per $500.00 of the transfer price, or fraction thereof, of the real property or the beneficial interest in real property. The buyer is responsible for $3.75, while the seller is responsible for $1.50.
State transfer taxes
Illinois imposes a tax of 50 cents per $500 of the property’s value.
County transfer taxes
According to the state’s Department of Revenue, “Counties may impose a tax of 25 cents per $500 of value on real estate transactions. Home rule municipalities may also impose an additional real estate transfer tax.”
Other transfer fees
In addition to transfer taxes, there are possible fees to consider, such as from a homeowner’s association or another local neighborhood organization. Again, as these can vary heavily based on location, it’s important to consult a professional.
If you’re selling your home for sale by owner, consulting a professional might help with some of the finer points of the process and give you a better idea of what you can expect.
Are transfer taxes deductible?
Unfortunately, transfer taxes do not qualify as deductible expenses on your income tax returns. However, there’s a silver lining for homeowners looking to mitigate their capital gains tax burden. Capital gains, the profit made from the sale of your property, are taxable by the federal government, much like the gains from selling other types of assets.
The IRS allows sellers to consider transfer taxes as part of the property’s selling costs. This means these taxes can be deducted from the final sale price of the home. By leveraging transfer taxes as selling costs, sellers can effectively reduce the capital gains tax owed on the profit from their sale, providing a strategic way to lower overall tax liabilities.
Transfer tax exemptions
Some sellers might find themselves eligible for exemptions from transfer taxes, depending on their specific circumstances and location.
These exemptions can significantly impact the overall cost of transferring property ownership. Here’s a brief overview of situations where transfer taxes may not apply:
- Property transfers involving governmental bodies or certain non-profit organizations.
- Transactions securing debt or other obligations.
- Amendments to previously recorded deeds without additional consideration.
- Sales priced under $500.
- Transactions where the deed is a tax deed.
- Releases of property that secures debt.
- Deeds of partition.
- Transactions between parent companies and their subsidiaries or between subsidiaries of the same parent due to business restructuring.
- Transfers from a subsidiary to its parent in exchange for stock cancellation or surrender.
- Properties involved in a bankruptcy plan confirmation.
- Properties in enterprise zones used for commercial or industrial purposes.
- Transfers to lenders resulting from mortgage foreclosures or in lieu of foreclosure.
- Properties under the H.O.M.E. Program.
- Transfers between legally recognized partners following court orders from separation or divorce proceedings.
Estimating transfer taxes for your home sale
Estimating the transfer taxes for your home sale in Chicago can seem daunting, but tools like HomeLight’s Net Proceeds Calculator make it easier. This calculator provides a quick estimate of your potential earnings from selling your home, factoring in essential costs such as closing expenses, agent commissions, and any necessary home improvements. By inputting specific details about your sale, you can get a clearer idea of what you’ll walk away with after all transactions are completed.
For a thorough assessment of your situation, including an accurate calculation of your transfer taxes and other closing costs, it’s best to work with a top real estate agent.
A skilled agent can offer valuable insights and guidance on how these costs can be negotiated depending on the current market dynamics. Discussing your transaction with an expert early in the process will help you understand all of the financial aspects of your home sale, including the potential to negotiate on transfer taxes, maximizing your total sale from the transaction.
Header Image Source: (Pedro Lastra/ Unsplash)
