Understanding Delaware’s 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.
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If you’re planning to sell your home in Delaware, you need to understand how transfer taxes work. Transfer taxes are fees imposed by state, county, or municipal authorities when a property changes hands.
These fees will vary across state lines and will have further variations depending on the rules and regulations in your city or state.
This short guide will explore how transfer taxes function in Delaware and what you, as a seller, can expect to pay when you transfer your property.
Disclaimer: This post is for educational purposes only and does not constitute legal or financial advice. Links and mentions of Delaware area tax services or attorneys should not be considered endorsements.
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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 is transferred from one person to another. According to the Federal Trade Commission, this tax is typically required when the title of a property—essentially the formal document that denotes ownership—is legally passed to a new owner.
The tax is a way for the government to monitor and record the change in property ownership, which helps ensure that all property records are up to date.
The amount owed in transfer taxes can vary widely depending on where the property is located. State, county, and even city regulations play a role in determining the rate and specific requirements for these taxes.
Primarily, these taxes serve to generate revenue for local governments, which is used to fund public services and infrastructure projects.
Who pays for transfer taxes?
In Delaware, traditionally, both the buyer and seller pay the costs of the transfer tax, splitting the total amount, usually levied at a rate of 4% of the purchase price.
First-time home buyers receive a 0.5% reduction in their rate, lowering it from 1.25% to 0.75%, claimable at closing. This reduction is capped at $2,000 and applies only to the first $400,000 of property value. This is paid by the buyer.
What are the types of transfer taxes?
Transfer taxes will typically vary based on local guidelines but can vary based on city, state, and county ordinances, depending on local rules and regulators. Here’s a quick look at how it works in Delaware.
State transfer taxes
According to the Delaware Department of Finance, the state imposes a tax at the rate of 3.0% of the fair market value of the property divided equally between the buyer and seller. Local municipalities can levy a tax of 1.5%. If the local tax levied exceeds 1%, the state will reduce the state tax to 2.5%.
Are transfer taxes deductible?
Unfortunately, transfer taxes are not deductible from your income tax. However, they can influence the amount of capital gains taxes you pay. Capital gains refer to the profit made from selling your property, which, like profits from other assets, is subject to federal taxes.
The Internal Revenue Service allows sellers to incorporate paid transfer taxes into their list of selling expenses. This adjustment can be made on the closing statement of the home sale, enabling sellers to reduce their taxable profit. By treating transfer taxes as selling costs, you can effectively decrease the capital gains tax owed, potentially saving you money.
Transfer tax exemptions
Some sellers might be eligible for exemptions from transfer taxes, depending on their location and specific circumstances. Delaware, for instance, offers a variety of exemptions that can significantly impact the transfer tax obligations during a property transaction. Here are some key exemptions:
- Conveyances between spouses or parent and child
- Transfers to religious organizations or nonprofit industrial development agencies
- Transactions involving the U.S. government, Delaware state, their agencies, or political subdivisions, including the University of Delaware
- Leasehold interests, mortgage foreclosures, and conveyances without monetary consideration
- Transfers between a parent corporation and its wholly-owned subsidiary, or to/from a corporation from an owner with identical real property and business ownership proportions
- Property valued under $100 and commercial property leases
Estimating transfer taxes for your home sale
Estimating the financial outcome of selling your home in Delaware, including understanding transfer taxes, can be complex. To get a quick and clear estimation, try using HomeLight’s Net Proceeds Calculator. This tool helps you calculate potential earnings by considering closing costs, agent fees, transfer taxes, and any renovations. It provides a comprehensive view of what you might net from the sale of your Delaware home.
For a more detailed and accurate assessment of your specific situation, it’s advisable to consult with a top real estate agent. A skilled agent can guide you through the nuances of transfer taxes and other closing costs. They can also help negotiate these expenses effectively, depending on the current market conditions, potentially saving you money and optimizing the sale process.
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