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A number of federal tax rules come into in play when you buy or sell a home, but one little caveat the IRS enforces with consistency is the law on transfer taxes. Although the actual transfer tax amount varies from one state to the next, the non-deductibility of this levy remains the same all over the country. Keep the transfer tax in mind when you're trying to calculate the true cost of buying your piece of the American dream.
A transfer tax can be an unpleasant surprise when you're presented with the papers at a real estate closing. Most of the states enforce these levies whenever property changes hands, and in most cases the seller ends up paying (buyers have the option of meeting some of the closing costs, including taxes). In the state of New Hampshire, for example, taxes were $.75 for every $100 of the sale price at the time of publication; if you buy a $100,000 home, your transfer tax on the deal comes to $750. In Georgia, in contrast, the rate is $.10 per $100. Alaska, Idaho, Indiana, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Oregon, Texas, Utah and Wyoming levy no transfer tax at all.
You have the right to deduct ordinary sales taxes on the purchase of a house on Schedule A, if you itemize. Other available deductions are real estate (property) taxes, points you pay to get the mortgage, and mortgage interest. Transfer taxes, however, are non-deductible for homes which are your principle residence. The IRS won't let you add them to the sales tax amount, nor do they show up as an adjustment to income or a credit.
The IRS does allow you to deduct transfer tax on rental properties. Also, homeowners may add in the transfer tax as well as other costs to the sales price to calculate the basis of the purchase, as long as you were the party paying the transfer tax. The costs borne by each party at the closing should be spelled out on the deed of sale. The basis amount will be important if and when you sell the home, and is the figure used to determine your taxable gain.
If you sell the house and pick up the transfer tax, then you can deduct that amount from the proceeds of the sale. This reduces your taxable gain. You can also use nondeductible commissions, escrow fees, recording fees and attorney fees to reduce the proceeds. You may not use transfer tax to adjust basis or proceeds, however, if you also deducted it (such as on a rental property).
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