Ch7. Property and Transfer Taxes — Real Estate Acquisition and Holding Taxes

Real Estate Transfer Tax (Acquisition Tax)

Overview

Taxpayer: Property acquirer (buyer, generally)
Taxable event: Transfer of title (deed recording)
Jurisdiction: State and local (no federal transfer tax on real estate)
Timeline: Due at or shortly after closing (varies by state)

Transfer Tax Rates

State transfer tax rates vary widely:
- No state transfer tax: Alaska, Idaho, Indiana, Louisiana,
  Mississippi, Missouri, Montana, New Mexico, North Dakota,
  Oregon, Texas, Utah, Wyoming

- Moderate rates (examples):
  California: 0.11% state ($1.10/$1,000)
  Florida: 0.70% ($7/$1,000); + documentary stamp tax on mortgage
  New York City: 1.0%–1.425% state + 1.0%–2.625% NYC transfer tax
  Pennsylvania: 1% state + 1% local (buyer and seller each pay 1%)

- Higher rates:
  Washington DC: 1.1%–1.45%
  Vermont: 1.25% on residential

Mortgage recording taxes (separate from transfer tax):
New York State: 0.5%–2.8% of mortgage amount
Florida: 0.35% on mortgage principal

Transfer Tax on Special Acquisitions

Inherited property:
- No transfer tax at federal level (no inheritance tax — only estate tax)
- Some states have state inheritance taxes (Pennsylvania, Iowa, Kentucky,
  Maryland, Nebraska, New Jersey, and some others)
- Inherited property gets stepped-up basis (IRC § 1014) — removes
  unrealized gain from income tax perspective

Gift property:
- Recipient assumes donor's carryover basis (IRC § 1015) — NOT stepped-up
- State deed recording fees may apply; typically no sales tax on gift transfer

Property Tax

Taxpayer: Property owner as of the assessment date
Taxable property: Land, buildings, personal property (in some states)
Assessment date: Varies by state (January 1 for most states)

Billing schedule:
Annual, semi-annual, or quarterly (varies widely)
Many homeowners pay through mortgage escrow (lender pays)

Rates (mill rates):
1 mill = $1 per $1,000 of assessed value
Effective rates range from ~0.3% (Hawaii) to ~2.5% (New Jersey)

Tax calculation:
Assessed value × mill rate = annual property tax
Many states assess at less than 100% of market value:
Example: Assessment ratio 80%; market value $500,000; mill rate 20 mills
Assessed value: $400,000
Annual property tax: $400,000 × 0.020 = $8,000

Property Tax on Different Property Types

Residential owner-occupied:
Often the lowest effective rate; homestead exemptions available
Assessment: Varies from purchase price (CA Prop 13) to full market value

Residential rental:
Often same or slightly higher rate than owner-occupied
No homestead exemption in most states

Commercial / industrial:
Often higher effective rates than residential
Assessment at full market value more common

Agricultural land:
Many states value at "current use" (agricultural value) rather than
development value — substantially reduces tax on farmland

Vacant land:
Often taxed at full market value; no exemptions apply
Some states impose higher effective rates on vacant land

Property Tax Billing Dates

Most common billing schedule (examples by state):
California: November 1 (1st installment); February 1 (2nd installment)
New York: July 1 and January 1 (bi-annual)
Texas: January 31 (full payment; October billing)
Florida: November 1 (first day available); April 1 (last day to pay)

If tax is < $2,000 (most states): Billed annually
Escrow accounts: If mortgaged, lender typically pays taxes from escrow

Comprehensive Property Tax (High-Value Holdings)

Federal wealth tax: None (no federal annual tax on net worth)

State-level:
A few states have attempted wealth taxes, but no major state wealth
tax is currently in effect. The SALT cap ($10,000) on federal returns
limits the deductibility of property and income taxes paid to states.

SALT Deduction (IRC § 164):
- Federal Schedule A itemized deduction
- Includes: state income tax OR sales tax (choose one) + property taxes
- Cap: $10,000 per return ($5,000 MFS)
- Set by TCJA; effective through 2025; subject to change post-2026

Impact:
Taxpayers in high-property-tax states often cannot deduct the full
amount of property taxes paid at the federal level.

Transfer tax rates ★★★★★ : Highly state-specific; range from 0% (many states) to 2%+ (NYC). No federal real estate transfer tax. Memory tip: Transfer taxes = state and local only; check your state before buying

Property tax assessment date ★★★★★ : Varies by state — January 1 is most common. The owner on the assessment date owes the tax. US has no single national assessment date (unlike Korean June 1 rule). Memory tip: In the US, the assessment date varies; always confirm the local rule at closing

Comprehensive property tax (equivalent to Korean 종부세) ★★★★☆ : No federal equivalent. SALT cap limits deductibility of state/local property taxes on federal return to $10,000. No US surtax on multi-property owners. *Memory tip: US: SALT cap =$ 10,000 federal limit on property+income tax deductions*

Practice Quiz

Q. A buyer purchases an apartment in New York City for $2,000,000. What transfer taxes apply?

New York State transfer tax: 0.4% × $2,000,000 =$ 8,000. NYC Transfer Tax: 1.425% × $2,000,000 =$ 28,500 (rate > $500,000). NYC Mansion Tax: 1%–3.9% on residential properties >$ 1M → 1.25% × $2,000,000 =$ 25,000. Total estimated transfer taxes: ~$61,500 (paid by buyer, generally).

Q. A condo owner paid $12,000 in real estate taxes and$ 5,000 in state income taxes in 2024. How much can they deduct on their federal Schedule A?

Maximum SALT deduction = $10,000. Combined state taxes =$ 17,000, but capped at $10,000 for federal purposes. Deduction =$ 10,000.