Transfer Tax

Sep 05, 2022 By Triston Martin

Transfer taxes are charges that are levied when property ownership or title is transferred from one person or entity to another. A state, municipality, county, or other entity may impose a transfer tax. Although it is not usually deductible from federal or state income taxes, it can be added to profit on securities and investment property calculations.

Understanding the Transfer Tax

For the privilege of transferring property within a jurisdiction, the state, county, and municipal authorities may impose a transfer tax. In effect, the government taxes the transfer of a legal title, certificate, or deed from a seller, to a buyer. The property value and property classification determine the amount of tax. Although the seller is responsible for the real property transfer tax, it is common for an agreement between the buyer and seller to pay the tax. Some states require the buyer to pay it if the seller fails to pay the tax or is exempted from it.

How A Transfer Tax Works

Different types of governments can assess a transfer tax. For example, when a city or county imposes real property transfer taxes or the federal government imposes taxes on the transfer of assets to heirs. The assessment rules may vary depending on the type of transfer and where it is being made. Real estate transfer taxes may include a fee for the closing costs. This fee will be paid to the county recorder's offices so the seller can transfer the title to the buyer.

The IRS may also collect transfer taxes, such as when an heir receives an inheritance and files an estate return. The taxes on wealth transfers tend to be more expensive than real property transfer taxes. The lifetime gift and estate exemption allow married couples to pass $24.12 million in 2022 on to their children without paying any taxes.

Transfer Taxes On Inheritances

On the inheritance of property, a transfer tax could also be applied. This tax is often called a "death tax,", especially by opponents of inheritance taxes. A death tax can be any gift tax, estate tax, or generation-skipping tax imposed upon the value of property inherited following the owner's death.

All Americans, except the most wealthy, have recently been exempted from federal taxes. Federal estate taxes apply to the gross estate of a deceased person, which usually includes all financial and real assets. The exclusion amount for taxpayers who inherit in 2021 is $11.7million ($12.06million for 2022). A gift tax applies to property or money transferred while a person lives. For gifts exceeding $15,000 in 2021, the federal gift tax applies to the gift giver, not the recipient. It is currently at 18% to 40%.

Types Of Transfer Taxes

Real Property Transfer Taxes

When the ownership of real property, such as a home, is transferred from one person to another, these taxes are levied. A state such as Nevada is one of the possible exceptions to the rule that title transfers between divorcing spouses are not subject to transfer taxes. Other states may follow this practice as well.

Gift Taxes

Someone may give money or assets to other relatives or children during their lifetime. These transfers may be taxable as the government doesn't want anyone to avoid paying estate taxes by giving away all their wealth before they die. Gift tax is usually only applicable to extremely wealthy individuals.

Individuals can give $16,000 to a child in 2022 before they have to add the gift towards their lifetime gift or estate tax limit. A married couple can gift up to $32,000 to their child in 2022 ($64,000 for an adult child). This would be a gift from one person to another. Any amount above this limit will count towards the lifetime limit of $12.06 million for 2022.

Estate Taxes

An estate tax can also be considered a transfer tax. This can be applied when an inheritance is large. A person's estate may include cash and any other assets they own or have an interest in. This includes land, businesses, and property. This transfer tax is only applicable to certain situations. You don't have to file an estate return or pay estate tax if you exceed the lifetime exemption for a gift or estate taxes.

Generation-Skipping Transfer Tax

A tax is analogous to the estate tax but levied on transactions that include generations that are two or more removed from the individual who made the transfer. As an example, a grandparent may give their grandkids their assets. Because this tax is exempt from multiple millions of dollars restrictions, only a limited number of persons end up having to pay it.

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