Knowing what hidden costs might come up when selling property is important. California applies a transfer tax when property is sold for over one hundred dollars. However, this tax does not apply in all situations. Knowing when it does not apply can help you save on closing costs.
What is a transfer tax?
Under California’s Documentary Transfer Tax Act, California imposes taxes for real estate transfers. This allows a county to impose a tax on any real estate sold, specifically on the instrument that transfers the property. The tax applies to any sale of property where the price or interest exceeds a value of one hundred dollars, at a rate of fifty-five cents for each $500 of the price. (Rev. & Tax. Code § 11911 (a).)
What does this mean for transferring property?
This tax applies to anyone who signs the instrument that transfers the property. (Rev. & Tax. Code § 11912.) This usually means it applies to the buyer who signs the deed following a sale.
If this tax does apply it must be apparent on the face of the document that is recorded. (Rev. & Tax. Code § 11932.) This means at closing the tax will be listed on the deed before it can be recorded or entered into the County Recorder’s office. For the deed to be recorded the tax must be paid. This is why the tax is often incorporated into the closing costs. (Rev. & Tax. Code § 11933.)
It is important to note that a transfer tax is considered an excise tax not a property tax.
(City of Huntington Beach v. Superior Court (1978) 78 Cal.App.3d 333, 341-342.) This is to say it is not a yearly tax but is a one-time tax as part of a sale, scaled based on the value of the property at the time it changes hands.
What are some exemptions?
Because of how steep this tax can be, it is important to know if your property is exempt from this tax. The application of this tax rests on a change in ownership and a sale of real estate. This means, the tax does not apply if the writing is securing debt, like a mortgage or a lien. (Rev. & Tax. Code § 11921.) Similarly, if the property is being given as a gift it will not be taxed. (Rev. & Tax. Code § 11930.) This means no transfer tax applies even if you receive property due to someone’s death.
However, it does mean a long-term lease of thirty five years or more may “approximate” ownership and be subject to the transfer tax. (Thrifty Corp. v. County of Los Angeles (1989) 210 Cal.App.3d 881, 885.)
Additionally, because this tax focuses on property changing hands for value, the tax does not apply when the deed or instrument is just changing someone’s proportional interest in the property. This also applies if it is just a change in title that is taking place. (Rev. & Tax. Code § 11930, 11931.)
For example, the sale of underlying property subject to a lease that does not actually result in a change in ownership will not trigger the transfer tax. Because the ownership interest in the property never changed hands there was no actual sale. (731 Market Street Owner, LLC v. City and County of San Francisco (2020) 50 Cal.App.5th 937, 947–948.) If this tax is mistakenly charged a refund will be issued.
Marital property is generally exempt from the transfer tax as well. Property transferred during a marriage or following divorce or dissolution proceedings is not necessarily taxed under the transfer tax. There are two requirements to make sure the property is exempt. First, the instrument transferring the property must explicitly say the property qualifies for that exemption, and it must be signed by one spouse. (Rev. & Tax. Code § 11927.)
A property transfer is also exempt if it involves a government or agency or is given to a nonprofit. (Rev. & Tax. Code 11928, 11929.)
What would an example of an exemption look like?
For example, Shawn’s grandfather gives him the family farm as a gift. This type of property transfer would be exempt from the transfer tax. While the farm is changing hands from Grandpa to Shawn, and the farm is likely worth more than $ one hundred dollars, there is nothing of value being given for it.
Alternatively, if Shawn wanted to give his sister Julie 50% interest in the farm he could. For example, Shawn gives Julie 50% interest in the farm while keeping a 50% interest for himself making them tenant in common owners. That transfer would not be taxed as Shawn is just changing proportional ownership of the farm.
If Shawn and Julie had a disagreement about what to do with the farm and wanted to partition it, the transfer tax might apply. If the partition was physical and just changed the method of holding title, it would be exempt. (Rev. & Tax Code § 62(a)(1).) This is because Shawn and Julie are keeping their same 50%. However, if the final division of property differed from the original ownership or resulted in a sale, it would be taxed.
If Shawn had instead given a half interest to his wife Lucy, that transfer would still be exempt. Similarly, even if they got divorced and a court held one of them would get the farm, that transfer would not be taxed because it is community property.
Conclusion
Property transfer tax is an important cost to be aware of in a real estate sale. It can vary by city and must be paid for the deed or instrument transferring the property to be recorded. However, because the tax focuses on the change of property ownership for value, there are many exemptions.
Knowing if an exemption applies can help you avoid an additional cost in transferring your property. If you find yourself in a property dispute over ownership percentages, selling the property may be a solution. If that is the case, partition may be a solution and this property transfer tax may apply. At Underwood Law, our partition attorneys can help you navigate your partition action efficiently and with care. We are here to help.
