The emergence of local real estate transfer taxes

Register now

Historically real estate transfer taxes have been established at the state level, codified in state law, and applied to all localities, counties and cities within the state. Increasingly, local jurisdictions have begun to impose additional taxes on real estate transactions under their own authority.

Many readers may have noticed a number of alerts coming to their inboxes with regard to cities imposing new real estate transfer taxes, as this trend has been gathering momentum. Lenders should not discount the impact of these changes.

As TRID requires transfer taxes to be disclosed in advance to borrowers, with a federally mandated zero tolerance level, accuracy is critically important. Missing a new local transfer tax can be very costly for the lender.

There have always been a handful of states where special tax rates applied in certain jurisdictions, but they were far more the exception than the rule. In 2018, there was a great deal of activity on this front and so far in 2019 about a dozen localities — mostly in high-volume, high-population states — have adopted their own local real estate transfer taxes.

This was particularly pronounced this past year in California, where a number of cities used ballot referendums to enact or increase existing local transfer taxes, often with the stated purpose of funding affordable housing. San Francisco and Oakland were among the first cities to take action. But this trend is not limited to California.

The Las Vegas City Council recently voted to petition the state for new legislation that would allow the city to increase the real property transfer tax, among other increases. According to published reports, Las Vegas is trying to address homelessness in Southern Nevada, and looking for the money to do it.

Something similar is now taking place in Chicago, where the city is considering tripling the real estate transfer tax, and Washington, D.C., where the transfer tax will rise to 5% effective Oct. 1.

Other municipalities have already enacted their new tax laws. Over the course of the past year, we have seen new local transfer taxes levied in Richmond and Hayward, Calif.; Baltimore; San Juan County, Wash.; Evanston, Ill.; and Pittston, Pa.

In most cases, the new taxes will only impact buyers, sellers and any lenders who are not aware of the taxes when they make their consumer disclosures. While these new taxes will increase the cost of real estate in these markets, it is not expected to dampen demand to any significant degree. But there is one possible exception.

A proposal currently under consideration in Boston would impose a 6% local transfer tax on any real estate sold for over $2 million. That's higher than we’ve seen in the past, but it could get worse. The proposal also contains language that would allow for a "flip tax penalty" to be assessed should the owner sell the real estate within 12 months of the purchase. In that case, an additional 25% of the value would be assessed and payable.

To put that into perspective, a buyer purchasing a $10 million property in Boston, rehabilitating it and then selling it nine months later for any amount, would owe the city $2.5 million in additional transfer taxes (based on the initial purchase price).

An initiative like this would impact more than just the transaction participants. It could effectively end the fix and flip real estate industry in Boston, taking thousands of jobs and millions in revenue away with it.

It's not yet clear what impact these changes will have on real estate sales in these metropolitan statistical areas. What is clear is that with zero tolerance to quote fees in an increasingly complex market, lenders face increased noncompliance risk.

More than ever, it is critical that lenders know exactly what the state transfer tax rate is and then properly identify the subject real estate's correct local jurisdiction in order to determine any potential local taxes. A mistake could cost the lender tens of thousands of dollars. In some large metropolitan areas, the costs could rise into the hundreds of thousands of dollars.

The other impact of these changes is that it renders calculated data on average transfer taxes meaningless. Lenders cannot use that information to estimate the cost to close a real estate transaction.

As more jurisdictions learn that they can earn more by adding their own real estate transfer taxes, we expect to see more tax code changes. Lenders that quote the tax too high will be forced to redisclose, possibly losing valuable time and delaying the loan closing. But those quoting the fees too low will be forced to pay far more.

We have been monitoring transfer taxes and other items lenders are required to disclose for the last 30 years. This lengthy experience allows us to support a lender’s disclosures under Loan Estimates and Closing Disclosures with ease. We are investing heavily in our research department to keep up with the changes so lenders can always know exactly what expenses will be involved in their transactions.

For reprint and licensing requests for this article, click here.
Enforcement Property taxes Real estate Purchase TRID