What Is a Transfer Tax?
A transfer tax is a charge levied on the transfer of ownership or title to property from one individual or entity to another.
A transfer tax may be imposed by a state, county, or municipality. It is usually not deductible from federal or state income taxes, although it may be added to the cost basis when profit on the sale of securities and investment property is calculated. Transfer tax is considered an excise tax in some states.
- 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 typically based on the value of the property.
- A federal or state inheritance tax or estate tax may be considered a type of transfer tax.
Understanding a Transfer Tax
A transfer tax on real estate may be imposed by state, county, or municipal authorities for the privilege of transferring real property within the jurisdiction. The government is effectively taxing the transfer of a legal deed, certificate, or title from a seller to a buyer.
The amount of the tax is based on the property value and the property classification.
The seller is liable for the real estate transfer tax, although it is not uncommon for an agreement to be reached for the buyer to pay the tax. Some states require that the buyer 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, Idaho, Indiana, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Texas, Utah, and Wyoming.
Transfer Taxes on Inheritances
A transfer tax may also be imposed on the transfer of property by inheritance. This is sometimes called a death tax, particularly by opponents of inheritance taxes.
A death tax may refer to any gift tax, estate tax, or generation-skipping transfer tax that is imposed on the value of property inherited after the death of the owner.
Exclusions for inheriting estates worth less than millions protect most Americans from owing estate taxes.
In recent years, all but the wealthiest Americans have been protected from these taxes by high dollar-amount exemptions at the federal level.
The federal estate tax applies to a decedent’s gross estate, which generally includes all of the person's financial and real assets. For taxpayers inheriting in 2020, the exclusion amount is $11.58 million. In 2021, it will be $11.7 million. From there, the tax ranges from 18% to 40% of the value of the estate.
There is also a gift tax that applies to transfers of money or property 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 Tax
The generation-skipping transfer (GST) tax is an additional tax on a transfer of title to a 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 their gifts or bequests directly to their grandchildren or great-grandchildren rather than to their children.
The same exclusions apply to the GST: The transfer must be worth more than $11.58 million in 2020 ($11.7 million in 2021) for the tax to kick in. For those who owe it, the rate is a flat 40%.
State Transfer Taxes
Fifteen states and the District of Columbia have either an estate tax or an inheritance tax, and one state has both. An estate tax is levied against the assets of the deceased, while an inheritance tax is owed by the recipient of the assets.