There are many so-called “hidden” taxes paid by Californians. You may not even know that you pay some of them. For instance, did you know that you pay a tax of $.036 per gallon on gasoline? A tax of $3.30 per gallon on liquor? A transfer tax of $1.10 per $1,000 of value of an interest in real estate? Most buyers and sellers know that there are closing costs associated with each real estate transaction. However, many do not know that a transfer tax is among the long list of closing costs that they will be presented with when it is time to sign the documents necessary to close their transaction.
A transfer tax is quite broad, and is imposed by a government on the transfer of any interest in real estate from one party to another with limited exemptions. In 1967, the California legislature authorized counties to charge $1.10 per $1,000 of the value of the real estate interest being transferred. All counties quickly enacted this transfer tax; thus, whenever one buys or sells real estate, the county transfer tax will be paid by the title company on behalf of the seller, who customarily pays the tax.
While $1,650 of transfer tax on the sale of a $1,500,000 home may seem unsubstantial at first, this can make a difference for first-time sellers who are using all of the sales proceeds to fund the purchase of their new home. The sudden knowledge of this transfer tax will rarely prevent a transaction from closing, but it may alter other plans, like delaying necessary repairs on the new home.
If you are a buyer and think you are free from paying transfer taxes, think again. As a result of cities’ lower tax revenues resulting from the passage of Proposition 13 in 1978, many found new ways to partially supplant those losses. The chosen means was the institution of their own city transfer taxes.
Not all cities have their own transfer taxes, but there are five cities within Santa Clara and San Mateo Counties that do impose one, which is customarily split equally between buyer and seller. Mountain View, Palo Alto, and San Jose all impose a tax of $3.30 per $1,000 of value. San Mateo imposes an even higher tax of $5.00 per $1,000 of value. Hillsborough imposes only a minimal $0.30 per $1,000 of value. With the exception of Hillsborough, these substantial taxes can make a decent impact on both buyers and sellers. A tax of $3.30 per $1,000 of value on a $1,500,000 house means that the city is paid $4,950—an extra cost of nearly $2,500 for both buyer and seller with a larger potential impact than the county transfer tax.
The purpose of both transfer taxes was to fund the general operation of the cities and counties. However, there are indications that new transfer taxes could be adopted in the future for public policy reasons. There is a severe lack of affordable housing in California, and Senate Bill 2 had proposed a $75 fee per transaction. While it has been scaled back to exclude purchase transactions, its success will be an indicator of whether there is sufficient legislative and public support for fees, essentially taxes, in order to fund the development of affordable housing.
DeLeon Realty believes it is critical that sellers and buyers are made aware of transfer taxes and other closing costs early in a transaction in order for them to adequately anticipate the use of their funds. The expertise of DeLeon Realty agents in taxation at all levels allows clients to be provided with the most accurate and comprehensive tax information and analysis, ensuring proper planning throughout their transaction.