Taxes. This small word packs mighty anxiety and uncertainty punch! It seems like everywhere you look, there's a tax on something. Despite Tennessee having attractive state tax laws, you can't entirely avoid paying taxes in the volunteer state. If you're interested in buying a home, what's commonly referred to as 'real property', you'll pay your fair share of closing costs including transfer taxes.
Transfer tax is not something that is typically discussed unless you're making a transfer of an interest in real estate from one owner to another. However, if you're looking to buy or sell a home, you'll hear about this term thrown around quite a bit.
We'll dive into this topic in greater detail below, discuss the ins and outs of transfer taxes, and help you be more informed in all of your future real estate transactions!
What Is A Real Estate Transfer Tax?
Not a day goes by where a realtor doesn't discuss transfer tax with a client who is hearing the term for the first time. If you haven't heard of it before, you're certainly not alone!
It's important to understand the Tennessee state transfer tax if you're thinking about buying or selling a home here. But what is transfer tax exactly and do you have to pay it on your property?
Real estate transfer tax is imposed on all transfers of realty defined by any instrument evidencing the transfer of real property from one owner to another. This includes a court deed, deeds of trust, deed decree partition deed, or other instrument evidencing the transfer of ownership. The important thing to remember is that it's a one-time tax that occurs any time you buy or sell a home, and the title of the home or property moves from one owner to another. Real property isn't just residential homes but also includes land and commercial buildings as well.
This tax liability must be paid upon recording the property deed with the local register of deeds office. The actual consideration is based on the property's market value or consideration for the transfer, whichever is greater. It's then recorded under oath, which helps the assessor determine exactly how much money is owed in transfer tax. If the recorded oath was intentionally filled out incorrectly to represent a lower number, the party can be charged for perjury.
Who Pays Real Estate Transfer Taxes Tennessee?
The law in Tennessee suggests either the buyer or seller can pay the transfer tax on the property. However, in practice, the buyer typically pays this tax as part of their closing costs. In the state of Tennessee, buyers aren't stuck with all of the closing costs. The seller is typically responsible for title insurance, and the title search fee. It's important to mention, all closing costs are up for negotiating. It's best to work with a top real estate professional like the ones at Felix Homes! Real estate agents aren't just here to help you find the right home, in the right neighborhood. They can provide you with a lot of other valuable tips and feedback, including negotiating various closing costs.
How Much Is The Real Estate Transfer Tax In Tennessee?
The Tennessee State Department of Revenue controls the Tennessee real estate transfer tax rate, which shall be $0.37 per every $100 indebtedness of property value. For example, if your home, land, or commercial building sells for $400,000, there shall be a required $1,480 in real estate transfer tax due upon the finalization of the sale. In comparison to some of the states that border Tennessee, this is on the higher end.
The state of North Carolina for example has an indebtedness transfer tax rate of $1 for every $500 and Georgia has a transfer tax rate of $0.50 for every $500 of property value. Despite Tennessee's higher rate of $0.37 per $100, Tennessee does offer a lot of tax incentives and a low cost of living. Many people from other parts of the country are coming to Tennessee in busloads for the attractive cost of living and tax incentives! Transfer tax can't be the only thing taken into consideration and should consider the total value of the property and the price you pay for it.
Do All States Have Real Estate Transfer Tax?
Not only does the actual real estate transfer tax amount vary by state, so does the law. This transfers of realty tax is not required in a handful of states, including:
- New Mexico
- North Dakota
- Oregon -rates change by county
Whereas they may not have real estate transfer tax, there may be other taxes specific to those states that Tennessee does not have.
Is It Possible To Write Off Real Estate Transfer Taxes?
This is another great question many of our clients ask us.
Whereas you cannot deduct real estate transfer taxes on a tax return, the home seller may be able to use this as a way to decrease the overall capital gains tax they'll pay on the sale of their home.
If the one selling the home ended up paying the real estate transfer tax, they can deduct this from the overall profit they made on the sale. This can end up saving you a thousand or so dollars, but you may need to work with a local CPA to be sure you're doing everything correctly.
Who Gets To Keep The Money?
The transfer taxes get paid to the local government, who use this tax money as an instrument to pay for whatever the town may need. This includes paying public government employees, paving the roads, maintaining parks, or building a new school.
Other Tax Considerations Worth Noting
Tax is collected in just about every commercial aspect of life, in just about every state. Buying or selling a home is a major financial transaction, so it makes sense there is a tax involved in the sale or purchase of a property. Transfer taxes are not the only taxes you need to be aware of. There are a few other taxes a home buyer or home seller will need to know.
Capital gains tax
When you're selling a home, you may be worried about how much money you'll pay in tax from the profit of your home. This amount can vary, but it really depends on how long you owned and live in the home, and the total amount of profit you made.
If you owned and lived in the residence for 2+ years before selling it, then up to $250,000 of profit is yours tax-free as a single filer. If you're married and file a joint tax return, that number jumps to $500,000. Considering the average sale price on a home in Tennessee, many of our clients don't need to worry about this!
It's important to note, conversely, if you sold your home for a loss, the loss in the value of the property does not deduct your overall taxable income.
Mortgage tax is another tax that a homebuyer will need to keep in mind. This can vary by state and is not imposed by the federal government. In Tennessee, the first $2,000 of debt is exempt from any taxation. Beyond that, the rate is $0.115 per $100 of indebtedness.
Property tax is paid to the local county or town. This can either be rolled into your monthly mortgage payment, or the town will require this to be paid either bi-yearly or yearly with a direct check. This isn't necessarily due at the point of closing, but certainly useful in determining your all-in monthly payment for owning the home.
Interest tax deductions
The interest tax deductible rule is forever evolving, but you can deduct the mortgage interest you paid during a given tax year up to a certain amount. This can help reduce your overall tax liability at year-end and keep more money in your pocket.
Just like real estate, where it's encouraged to work with a local real estate agent, we recommend you work with a local CPA. After all, tax law can be tricky. A local CPA will help you navigate the various tax liability questions you'll have as a new home buyer or as someone who is thinking about selling their home.
Felix Homes Is Here To Help
Death and taxes are a given but you know what's not? Paying a real estate agent a 6% commission when you sell your home. Despite what some agents may tell you, paying a 6% commission is not a requirement, nor does it need to be standard practice.
The commission can be negotiated. Felix Homes is a local Tennessee real estate company, and we believe no one should pay a 6% commission fee to sell their home. The 6% rates may have been warranted 20 or 30 years ago, but in today's modern world this high rate is simply too much!
Our low-commission agents at Felix Homes are committed to helping homeowners keep more profit in their wallets once the transaction is finalized. On average, we help homeowners keep an additional $8,100 in home equity on our average sale. You may be wondering - 'how is that even possible!?'
If so, you aren't alone. Many of our clients have never heard of a 1% commission realtor before choosing to sell with Felix. We charge you a 1% fee to sell your home instead of the standard 3% fee many agents charge. Not only is our fee less, but we also have a track record of helping you get more for your home and sell it in a quicker timeframe.
We're passionate about Tennessee real estate and will help you find the home you're looking for. Whether you want to search right here in the heart of Nashville, or any other city or suburb in the great state of Tennessee, you can trust our team of agents to help you search and find the perfect place to call home!