Buried deep in the package of a home sale’s closing costs that are paid with every property transfer is an expense called the documentary transfer tax (see linked glossary for “transfer tax”) or sales transfer tax. This is a charge that is levied by the California state government on every property transfer that occurs, big or small, residential or commercial. However, when a homebuyer is purchasing a home, this expense rarely comes up or is discussed. In many cases, the charge is also passed onto the buyer because, again, it’s not discussed much, so it gets packaged under the radar.
Don’t be worried if this is the first time you may have heard of a sales transfer tax, even if you are a homeowner and went through a purchase already. The disclosure of the expense is not very well discussed, and it’s even harder to understand the tax when it gets explained. To make matters worse, the amount of the transfer tax varies by location. Both cities and counties get some play in the calculation, and it represents a nice pot of general fund revenue for their municipal coffers which can then be used on any municipal program, the ideal type of tax fund. This can result in not just a double but a triple tax, especially when a city-county-state transfer tax applies.
Transfer Tax Defined
As mentioned above, the transfer tax is a valid, legal charge, tax, applied by the government. It’s specific to California state and its cities and counties, covering homes within their respective authority area (i.e. jurisdiction). The actual tax will vary by property because it is calculated on the final sale price of a property.
Who pays the tax depends on the sales agreement. It is almost always connected at the time the title documents are filed with the county recorder – no tax payment, no title recording. So in different instances, the payer could be the buyer, the seller, or both parties. This is why buyers who are not aware could agree to pay the tax buried in closing costs if they don’t look for it and negotiate the responsibility. Now, this doesn’t happen all the time. The general rule in California is that the seller is responsible for the tax payment in most jurisdictions. However, some localities have changed the rules and others have no mandate. So technically, the cost responsibility is then negotiable.
The negotiation aspect often comes up the most when the local conditions have created a strong buyer’s market. In a seller’s market, the home seller will generally call the shots and take the highest bidder among many options. In a buyer’s market, the property sale needs to be made attractive to bring in the customer and lock the sale. Where no clear advantage exists, negotiation can go both ways.
Calculating the Tax
As mentioned earlier, the actual transfer tax on a property will depend on where it is located and which government level applies its portion of the tax to the property. So what is paid in one city or county will likely not be the same in another, but it will probably be similar. The math is driven by a percentage value of the selling property’s final sale price paid normally. However, in some cases, it can be a flat charge or a scale, i.e. $1,000 for every $100,000 in a sales price. Here’s a real-life example from Sacramento County:
The tax rate is $.55 for each $500, or fractional part thereof, of the value of the property, less any loans assumed by the buyer.
In this particular case, the County of Sacramento’s transfer tax does not include the City of Sacramento’s tax because that municipality charges a separate tax in addition. However, if the City had opted into the County’s program, the tax levied would then be a bit higher, incorporating the County’s value.
A typical formula split between a county and city such as San Diego would be as follows:
The final home selling value: $500,000
County percent for transfer ($0.55 per $1,000): $275
City percent for transfer ($0.55 per $1,000): $275
Total tax (A+B) = $550
To run this on a calculator you would take your sales price, convert the legal jargon of $0.55 per $1,000 to a percentage (0.055 percent), and then multiply it by the final selling value.
Exemptions to the Transfer Tax
A number of reasons for exemption from the transfer tax are listed out in the state Revenue Code sections. These include:
- Transfer for divorce (Section 11927)
- Collateral for a debt or a return of collateral (Section 11921)
- A court-ordered transfer (Section 11911)
- A gift of the title (Section 11911)
- A change of ownership manner but holding the same property (Section 11911)
- Transfer into or out of a trust (Section 11930)
- Changing a legal name (Section 11911)
- Separating property between spouses (Section 11911)
- Establishment of easements worth less than $100 (Section 11911)
- Establishment of liens (Section 11911)
- Dissolution of partnerships but partners still hold their share of the title (Section 11925)
- Transfer due to foreclosure (Section 11926)
In addition to the state code, local governments could issue ordinances that add on to the state law and create local exceptions to the rule as well. Again, it varies by location, so a home seller needs to do their homework ahead of time to know what will work for their given situation.
So if you’re going to sell, make sure to do your homework on documentary transfer tax in your local area first. This information will be provided by your county or city on their government website, typically on the page for the county or city assessor or recorder’s office. Otherwise, you may be in for a surprise after the fact on a sizable sale cost that could have been negotiated.
