Understanding The California Real Estate Transfer Tax

The California real estate transfer tax is a charge levied by the California state government on every property at the point of transfer, eg. when the property is sold to a new owner. The transfer tax applies to both residential and commercial properties irrespective of size and is a sales cost investors in California need to be aware of.

The transfer tax, also known as a documentary transfer tax or sales tax is a lesser-known property sales cost that often simply isn’t discussed before a property deal is closed. This often results in the buyer or seller being hit with a large unexpected tax payment, without the paying party even knowing, as it gets packaged into the sale costs and slips under the radar.

This is problematic as essentially wh pays the California transfer tax is up for negotiation, and with proper property accounting the cost can be tax deductible under certain circumstances (we explore this later in the article so make sure to read on).

The documentary transfer tax often doesn’t get talked about during the sale of a property and can be difficult to understand even when it is. In this article, we take a closer look at it, who it gets paid to, who is responsible for paying and what you can do to offset this cost.

Defining transfer tax rate

In short, the California real estate transfer tax is a tax imposed by the County and/or City for the transfer of property.

The tax is a valid and legal charge applied by the government when the ownership of a property changes hands. At the point of transfer of ownership an ownership transfer document (eg. the Grant Deed) needs to be recorded in the County Recorder’s office where the property is located. Under the California Revenue and Taxation Code, the County Recorder is then entitled to collect a “transfer fee” on behalf of the State Board of Equalization. They do not care who exactly pays this fee, all that matters is that this documentary transfer tax is paid by someone in the end. This tax is a reliable part of the revenue that is generated for the individual counties and cities.

How is the property transfer tax rate calculated?

The actual tax amount is dependent on the value and location of the property. This means that you may be required to pay a different California real estate transfer tax in different cities. However, with that said, the tax amount most likely won’t vary a great deal. Generally, it is derived as a percentage amount of the property’s final sale price.

The base tax amount is $1.10 per $1,000 of the sales price, but different cities sometimes collect various transfer taxes on top as well, so it’s important to check on this before you initiate your transaction.

It is important to keep in mind that many cities and locales in California have the authority to add additional transfer taxes on top of the standard county rates. You will want to research your local costs and taxes to ensure you are aware of the actual total owed. For example, Alameda County may charge up to $12 per $1000 of home value (Ordinance No. 2987 AMC). Berkeley on the other hand can charge up to $25 $1,000 of home value on properties over $1.5 million in value (Ordinance No. 6072-NS), and Oakland may charge up to $25 per $1,000 of home value depending on the properties value.

Check local rates before signing a purchase agreement to ensure you’re not blindsided by an unexpected tax.

Who should pay transfer taxes in California: Buyer or Seller

When it comes to deciding who actually pays the transfer tax in California, the County Recorder does not care who pays, as long as it gets paid if it is due. Some localities have changed the rules and others have no mandate. The general rule in California is that the seller is responsible for the tax payment in most jurisdictions. In reality, who pays, is often open to negotiation. Often, in the Northern parts of California, the seller will pay the transfer tax, and the reverse is true for Southern California.

What is the transfer tax rate in California in 2021?

The actual property transfer fees are, as mentioned above, dependent on the final sale price of the property. However, when it comes to working out the eventual amount owed the California Revenue and Taxation Code states that all the counties in California have to pay the same rate.

The current tax rate is $1.10 per $1000 or $0.55 per $500. So, if your home sells for $500,000, the property transfer tax is $550.

Can you deduct transfer tax from Income tax returns?

A central question that a lot of landlords and real estate investors ask when they first come face to face with this transfer tax is, is the transfer tax deductible? The short answer is, no. According to the IRS (Internal Revenue Service), property transfer taxes cannot be deducted from your income tax return.

However, transfer taxes can be deducted from your overall capital gain when you eventually sell the property. This means that while the cost is not immediately reclaimable, it can be reclaimed in the long term.

Essentially, when you come to sell the property, you can add the initial property transfer tax to the cost basis reducing the amount of profit you technically made and the overall capital gain tax that you will be required to pay. If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale.

What are the transfer tax exemptions in California?

There are a number of reasons for exemption from the California transfer tax. These exemptions are listed in the Revenue and Taxation Code sections. A few exemptions include:

• (Section 11927) Dissolution of marriage
• (Section 11911) Gift
• (Section 11923) Sale approved in court proceedings eg. filed for bankruptcy.
• (Section 11930) Transfer into or out of a trust
• (Section 11930) Inter Vivos gift or reason of death
• (Section 11926) Transfer due to foreclosure

You can view the full list of exemptions here.

Conclusion

In addition to the state code, some local governments have issued ordinances that add to the state law. This could be in regard to the total amount of transfer tax owed or the rules of exemption to the transfer tax. Both sellers and buyers need to do their homework to make sure they fully understand the local property transfer tax in California.

Typically, the information you are looking for can be found on your county or city on their government website, on the page for the county or city assessor, or recorder’s office. If you don’t do this research before signing the sale agreement you could be hit with an unexpected tax cost of hundreds or even thousands of dollars.

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