DEFINITION of Transfer Tax
A transfer tax is any kind of tax that is levied on the transfer of ownership or title to property from one entity to another. Transfer taxes are usually non-deductible, although they may be added to the basis on the sale of securities and/or investment property.
Transfer tax is also considered an excise tax in some states.
BREAKING DOWN Transfer Tax
Transfer taxes can be levied at the federal, state and local levels, depending on the type of property being transferred.
Transfer tax on real estate is imposed by state, county, and municipal authorities for the privilege of transferring real property within the jurisdiction. These local governments often tax the transfer of legal deeds, certificates and titles to property from the seller to the buyer. The tax is based on property value and property classification. The seller is liable for the real estate transfer tax, although it is not uncommon for an agreement to be reached which involves the buyer settling this tax. Some states require that the buyer pays for the tax if the seller does not pay the tax or is exempt from paying the tax.
The following states do not impose a transfer tax on real estate: Alaska, Idaho, Indiana, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Texas, Utah and Wyoming. Meanwhile, Arizona charges a flat fee of $2.
Death tax refers to gift tax, estate tax and generation-skipping transfer tax which are imposed on a property after the death of the owner. The federal government through the Internal Revenue Service (IRS) taxes the value of the property itself through these death taxes.
The federal estate tax applies to the transfer of property at death. The estate tax is an indirect tax on the transfer of property as a result of a death and not a tax on the property itself. It applies to a decedent’s gross estate, which generally includes all the decedent’s financial and real assets. The tax ranges from 18% to 40%. For persons dying in 2019, the exclusion amount is $11.4 million. The exclusion amount is $11.58 million in 2020.
The gift tax applies to transfers made while a person is living. The federal gift tax ranges from 18% to 40% and applies to the giver of a gift, not the recipient, for amounts above $15,000.
The generation-skipping transfer (GST) tax is an additional tax on a transfer of property that skips a generation. The GST tax was implemented to prevent families from avoiding the estate tax for one or more generations by making gifts or bequests directly to grandchildren or great-grandchildren. The GST tax effectively imposes a second layer of tax on wealth transfers to recipients who are two or more generations younger than the donor.