DROdio Real Estate

First, let's define transfer and grantor's taxes, why they exist, and the current trends in MD, DC and VA.

Transfer Taxes are defined as:

A transfer tax is a tax on the passing of title to property from one person (or entity) to another. In a narrow legal sense, a transfer tax is essentially a transaction fee imposed on the transfer of title to property. This kind of tax is typically imposed where there is a legal requirement for registration of the transfer, such as transfers of real estate, shares, or bond. Examples of such taxes include some forms of stamp duty, real estate transfer tax, and levies for the formal registration of a transfer.

Grantor's Taxes

Grantor's taxes are the same as transfer taxes but specific to Virginia and represent a levy on home sellers at closing, although builders generally write their contracts to make the tax the buyer's responsibility (Source). The issue in Virgina is that as of January 1, 2008, that the grantor's tax increased five fold, but more on that later in the post.

Take a look at the sample good faith estimate at left and you'll see transfer and related taxes listed under "government."

If you look carefully, you'll see that of the total $6445 estimated closing costs in this example, of that $1810 are accounted for in transfer and recording fees. That's a sizable chunk with it being roughly 1/3 of the estimated closing costs. One question you might ask is, why do they exist and what do they mean to me?

Why Do They Exist?

Transfer taxes are typically directed towards funding housing programs for low-income residents, preservation of open spaces in residential and commercial areas, land/space acquisition and some states direct the revenue to a state general fund. So their purpose actually vary depending on the state and can also be used to inflate real estate values in order to slow the market.

What Does This Mean To Me?

Simply, you pay the tax upon the initial purchase and again when you sell the home. The assignment of transfer/grantor's tax responsibility varies state to state. Given the current issues in today's economy this may be of some concern to you with cash strapped buyers and/or sellers.

Recently, local county governments are feeling the pinch of the recession and must find ways to make up for budget short falls so they pass the buck to you, the home buyer and seller. It's not exactly news you want to hear, nonetheless, issues that may be of concern as we begin to see rising costs in other areas. This has been the current trend as of late, county governments increasing transfer, property and recording taxes in order to make up for budget shortfalls which means your monthly payment increases along with your transfer tax rate at the purchase and sale of your home.

Current Market Trends In Maryland and Virginia

As mentioned earlier, Virgina plans to increase their grantor's tax (same as transfer tax in other states) five fold from 10 cents per $100 to 50 cents per $100. Per the example given in this Washington Post article (written before the increase):

Currently the tax is 10 cents per $100 of either the property's assessed value or its selling price, usually the latter. That means that on a $500,000 house, the tax has been a relatively modest $500.

On Jan. 1, however, the grantor's tax is slated to increase to 50 cents per $100 — but only in Northern Virginia. On a $500,000 home, that will be $2,500.

Since sellers typically pay this tax in Virginia, this may cause some surprises at the closing table as most Realtors aren't aware of this new increase, be sure to discuss any concerns should you not see this accurately reflected on your Good Faith Estimate. Still, even with a five-fold increase, sellers in VA will still pay less transfer taxes than their counterparts in Maryland and DC. On the same $500,000 house in DC sellers will pay $7250 and MD sellers there will shell out $7500. This is compared to the $2500 paid in VA on the same $500,000 house, so sellers in Virginia still come out on top.

Recap:

• Grantor's and Transfer taxes are paid at the purchase and sale of a home
• Northern VA has increased their grantor's taxes five-fold, significantly increasing the transfer tax paid at closing but not more than DC and MD
• Given recent transfer tax increases, grantor's and transfer taxes will become a significant portion of the estimated closing costs
• Keep abreast of changes and increases which may affect your bottom line at the closing table
• Discuss any concerns with your Realtor upon receiving your good faith estimate

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