Transfer Tax Definition

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Transfer Tax Definition

What Is a Transfer Tax?

A transfer tax is a fee paid on the transfer of property ownership or title from one person or business to another. A state, county, or municipality may levy a transfer tax. It is often not deductible from federal or state income taxes, but it may be added to the cost basis for calculating profit on the sale of securities and investment property. Some states regard transfer tax to be an excise tax.

Key Takeaways

  • A transfer tax is a fee levied by a state or local government in order to effectuate the transfer of property from one owner to another.
  • The tax is usually levied depending on the property’s value.
  • An inheritance tax or estate tax imposed by the federal or state governments may be regarded a sort of transfer tax.

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Understanding a Transfer Tax

State, county, or municipal authorities may levy a real estate transfer tax for the privilege of transferring real property within their jurisdiction. The transfer of a legal deed, certificate, or title from a seller to a buyer is effectively taxed by the government. The tax amount is determined by the property value and classification.

The seller is responsible for the real estate transfer tax, while it is fairly unusual for the buyer to agree to pay the tax. If the seller does not pay or is excluded from paying the tax, some jurisdictions compel the buyer to pay it.

Some states do not levy a real estate transfer tax. Alaska, Arizona, Idaho, Indiana, Louisiana, Mississippi, Missouri, Montana, North Dakota, Oregon, Texas, Utah, and Wyoming are among them.

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Transfer Taxes on Inheritances

A transfer tax may also be levied on the inheritance of property. This is commonly referred to as a death tax, especially by opponents of inheritance taxes.

A death tax is any gift tax, estate tax, or generation-skipping transfer tax levied on the value of property inherited after the owner’s death.

Most Americans are exempt from paying estate taxes because they inherit estates worth less than a million dollars.

In recent years, significant dollar-amount exemptions at the federal level have shielded all but the richest Americans from these taxes.

The federal estate tax is levied on a decedent’s gross estate, which comprises all of his or her financial and real assets. The exclusion limit for taxpayers inheriting in 2021 is $11.7 million ($12.06 million in 2022).

A gift tax also applies to transfers of money or property made while a person is alive. For donations more than $15,000 in 2021 ($16,000 in 2020), the federal gift tax varies from 18% to 40% and applies to the donor, not the receiver.

The Generation-Skipping Transfer Tax

The generation-skipping transfer (GST) tax is an extra tax levied on a property transfer that skips a generation. The GST tax was enacted to deter families from evading the estate tax for one or more generations by giving gifts or bequests to their grandkids or great-grandchildren instead of their children.

The GST has the same exclusions: the transfer must be valued more than $11.7 million in 2021 ($12.06 million in 2022) for the tax to apply.

State Transfer Taxes

There are estate and inheritance taxes in fifteen states and the District of Columbia, and one state has both. An estate tax is charged on the deceased’s assets, while an inheritance tax is levied on the beneficiary of the assets.

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