Understanding Land Transfer Tax

In many states in the United States, land transfer taxes do not apply as this is a decision made by local governments. In Canada, however, land transfer tax is an ordinary tax paid by those who transfer property. If you are not sure whether there is a land transfer tax in your county or state, a real estate professional can usually provide you with the information you need. In the states that do have them, many people wonder what they are and why they are even necessary.

What is land transfer tax?

Simply stated, it is a one-time tax that is assessed when one property owner sells their property to someone else. Usually, the amount assessed is a percentage of the purchase price and is paid to the government in the region such as county or city government.

The amount that is required in those counties that do have land transfer tax in place can fluctuate, depending on the needs of a city or county. For example, a city manager may go before voters and ask that this tax be temporarily or permanently increased in order to cover budget shortfalls, support public schools, relieve the burden on property tax, etc.

Benefits to those states that have land transfer taxes

The states that do have a land transfer tax benefit in several ways. Frequently, these taxes help to relieve pressure on property taxes, which means not only fewer property taxes to residents, but supporting the infrastructure necessary to serve a population that is quickly increasing.

Property taxes are used in most states to help alleviate a portion of expenses spent on public schools and even state Medicaid bills. Land transfer taxes help absorb some of this expense, so that home owners aren't facing constantly rising property taxes. This helps older individuals who are on fixed incomes to be able to remain in their homes.

Land transfer tax is a subject of much debate in Canada, where many feel that these costs are simply a huge waste of their money. While these taxes are supposed to help support municipal services, many people feel that they go toward helping to fund the city council when funds have been misspent, or to increasing salaries for teachers.

Is the buyer or the seller of the property responsible for these taxes?

It really depends on the laws in your region. In some instances, both; however, most of the time a contract is drawn up between the seller and the buyer so that the terms of the agreement are clearly understood. In some instances, the seller may voluntarily agree to pay the land transfer tax simply to encourage or facilitate the agreement.

In Canada, it is typically the buyer who will be responsible for paying the taxes.

There are also exemption rules that determine whether first-time home buyers are required to pay this tax, and these rules vary from state to state. For those with questions regarding land transfer taxes, it's recommended that you call your local tax and assessments office or the Ministry of Finance in Canada.