What Is a Transfer Tax?

Transfer Taxes Explained in Less Than 5 Minutes

Definition
A transfer tax is a fee imposed based on the transfer of something of value between two parties.
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A transfer tax is a fee imposed based on the transfer of something of value between two parties. In many cases, this applies to real estate transactions, but it can also involve transferring money or other assets to family members. 

Understanding transfer taxes can help you get a full sense of real estate costs or potentially help with estate planning.

Definition and Examples of Transfer Taxes

A transfer tax is a type of tax that is assessed when money or property transfers between two parties in certain situations. This often applies to real property, such as housing, where state and/or local governments will assess a tax on the transfer of that property from one party to another. 

For example, in Nevada, when real property is transferred, such as when a house is sold, there is generally a baseline tax of $1.95 for each $500 in value of the property, though certain exemptions apply. So, the sale of a $500,000 home could result in a transfer tax of $1,950. The seller often pays the transfer tax (subject to local laws), but that is something that can be worked out as part of a real estate negotiation.

A transfer tax can also apply to transferring cash or other types of assets as a way to pass on wealth to family members. For example, a parent might want to pass on an inheritance to their children, but depending on how much they leave in their estate, that transfer could be taxed. 

How a Transfer Tax Works

A transfer tax can be assessed by different types of governments, such as when city or county governments impose real property transfer taxes or when the federal government imposes transfer taxes related to passing on assets to heirs. 

Depending on what’s being transferred and where, the assessment rules can vary. With real estate transfer taxes, for example, a fee may be collected as part of closing costs and given to the county recorder’s office so that the seller can transfer the title to the buyer. 

The Internal Revenue Service (IRS) might also collect transfer taxes, such as when an heir receives a large inheritance and files an estate tax return. However, the taxes on transfers of wealth tend to be reserved for much higher amounts, so they’re generally not as common as real property transfer taxes. For example, the lifetime gift and estate tax exemption means that a married couple could theoretically pass on $24.12 million in 2022 to their children before incurring any of these taxes.

Note

Gifts to a spouse are generally exempt from inheritance-related transfer taxes. Also exempt: Tuition or medical expenses you pay for someone, gifts to a political organization, and gifts to qualifying charities.

Types of Transfer Taxes

There are four main types of transfer taxes. These include:

Real Property Transfer Taxes: These taxes are assessed when real property such as housing gets transferred between two parties. Certain exclusions may apply, however, such as in Nevada where transfer taxes do not apply to a title change between former spouses as part of a divorce.

Gift Taxes​​: During someone’s lifetime, they may decide to gift money or other assets to their children or other family members. These transfers could potentially be taxed, as the government does not want someone to avoid paying an estate tax by giving away all of their money right before they pass away. That said, gift tax tends to only apply to very wealthy people.

In 2022, an individual can gift $16,000 per person before they even have to count a gift toward the lifetime gift and estate tax limit. So, a married couple could gift up to $32,000 in 2022 to a child ($64,000 if their adult child is married since that would be a gift to and from two people). Anything above these amounts then counts toward the lifetime limit, which is set at $12.06 million in 2022.

Estate Taxes: Estate taxes can also be a type of transfer tax, which can apply when a large inheritance gets passed on. The value of an estate can include cash and anything else that the deceased individual owns or has an interest in, such as land or a business. However, since you only have to file an estate tax return and pay estate tax for amounts that exceed the lifetime exemption for gift and estate taxes, this transfer tax only applies to very limited situations.

Generation-Skipping Transfer Tax: The generation-skipping transfer tax is similar to the estate tax, but it applies to transfers to those two or more generations below the person making the transfer, such as when a grandparent transfers assets to grandchildren. However, this too has multi-million dollar exemptions, so only a limited number of people end up having to pay this tax.

Key Takeaways

  • Transfer taxes are taxes that can apply to transferring property or other types of assets, such as a cash inheritance gifted to children.
  • Real property transfer taxes tend to be more common, as other types of transfer taxes typically apply to very large amounts, beyond what the average person can generally pass on to heirs.
  • Transfer taxes often have many exemptions that may enable you to avoid having to pay these fees. 
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Sources
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  1. State of Nevada Department of Taxation. “Real Property Tax & FAQs.” 

  2. American Bar Association. “Estate, Gift, and GST Taxes.” 

  3. JD Supra. “IRS Announces Increased Gift and Estate Tax Exemption Amounts.” 

  4. IRS. “Frequently Asked Questions on Gift Taxes.” 

  5. IRS. “Estate Tax.”

  6. IRS. “Estate Tax.”

  7. IRS. “Instructions for Form 706-GS(T) (11/2021).” 

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