Taxes When Transferring Real Estate

Transferring real estate can be a significant financial decision, whether it involves selling a property, gifting it to a family member, or including it in an estate plan. However, it’s important to understand the taxes associated with real estate transfers, as these costs can impact the overall value of the transaction. A lawyer, like an IRS tax lawyer, knows that various tax rules apply depending on the nature of the transfer, the parties involved, and the jurisdiction where the property is located.

Transfer Taxes And Recording Fees

It is crucial to have a lawyer who understands real estate law by your side. In many states and municipalities, transfer taxes are assessed when real estate changes ownership. These taxes are typically calculated as a percentage of the property’s value or sale price. For example, a state might impose a transfer tax of 0.5% of the sale price, while local governments may add their own transfer fees on top of this amount.

Recording fees, which cover the cost of updating public records to reflect the new ownership, may also apply. While these fees are usually smaller than transfer taxes, they are still an important consideration in any real estate transaction.

Capital Gains Tax On Real Estate Sales

If you sell a property for more than its original purchase price, you may be subject to capital gains tax on the profit. The tax rate depends on factors such as how long you owned the property and your overall income. Short-term gains, from properties held for less than a year, are taxed at the same rate as ordinary income. Long-term gains, from properties held for more than a year, are generally taxed at lower rates.

For primary residences, homeowners may qualify for an exclusion of up to $250,000 in gains for single filers or $500,000 for married couples filing jointly. To qualify, you must have owned and used the home as your main residence for at least two of the last five years.

Gift Taxes For Real Estate Transfers

When transferring real estate as a gift, such as to a family member, gift tax rules may apply. The IRS allows an annual exclusion amount—currently $17,000 per recipient in 2023—before gift taxes are assessed. If the property’s value exceeds this threshold, the excess is applied toward the lifetime gift and estate tax exemption, which is currently over $12 million per individual.

Property Taxes After A Transfer

A real estate transfer may also affect the property taxes owed on the property. Some jurisdictions reassess property taxes based on the current market value after a transfer, potentially increasing the tax burden for the new owner. Exemptions or caps on reassessment may apply in certain situations, such as transfers between family members or to a spouse.

Why Legal And Tax Guidance Matters

Real estate transfers often involve multiple layers of tax considerations, from transfer taxes and capital gains to gift and estate taxes. Proper planning and documentation can help reduce potential tax liabilities and avoid unexpected costs.

Our friends at Crepeau Mourges discuss the importance of consulting with legal and tax professionals when transferring real estate to ensure all relevant tax implications are addressed. Real estate transfers can trigger various taxes depending on the type of transaction and the circumstances of the parties involved. By understanding these tax obligations, reviewing potential exemptions, and working with professionals to structure the transfer, you can manage the process effectively and minimize unnecessary costs. Speak with a lawyer today.