Who Pays Excise Tax on Real Estate?

Real estate excise tax (REET) is a levy imposed on the transfer of real property ownership. Governments use the revenue generated to fund public services and infrastructure projects.

Understanding Real Estate Excise Tax

Real estate excise tax is a charge on the privilege of transferring real property. It is also known as real estate transfer tax, conveyance fee, recordation tax, or documentary transfer tax, depending on the jurisdiction. This tax applies to various transactions, including sales, gifts, inheritances, foreclosures, and land contracts. It can also be triggered by the transfer of a controlling interest in an entity that owns real property.

These funds are a significant source of revenue for state and local governments. They often support public services like schools, housing programs, and transit initiatives. Tax rates and rules vary considerably by state and local jurisdiction.

Identifying the Primary Payer

In most real estate transactions, the seller is primarily responsible for paying the real estate excise tax. This is viewed as a tax on the act of selling the property. During closing, the tax amount is often calculated and deducted directly from the seller’s proceeds.

While the seller holds the legal responsibility for this tax, the economic burden can sometimes be negotiated between the buyer and seller within the sale contract. If the seller fails to pay the excise tax, the legal liability can shift to the buyer, and the unpaid amount may result in a lien on the property.

Exemptions and Special Transactions

While the seller typically bears the burden of real estate excise tax, certain transactions may be exempt from this tax, or the responsibility for payment might shift. Common exemptions often include transfers without consideration, such as gifts of real property. Transfers that occur due to inheritance or devise, whether through a will or intestacy, are also frequently exempt.

Other exempt scenarios can include transfers between spouses, often arising from divorce settlements or community property agreements. Government transfers, certain foreclosures, or deeds in lieu of foreclosure may also qualify for exemption. Additionally, transfers to or from trusts where the beneficial ownership of the property does not change are often exempt from the tax.

In rare instances, the buyer might assume responsibility for the tax, particularly if the seller defaults on their payment, making the buyer ultimately liable. While less common, specific types of transactions, such as certain land contracts, or agreements in some jurisdictions, might also stipulate that the buyer is responsible for the tax, or that it is shared between parties. It is important to remember that the rules and available exemptions for real estate excise tax can differ significantly from one state or local jurisdiction to another.

The Payment Process

Once the responsible party for the real estate excise tax has been identified and the amount determined, the payment process typically occurs during the property’s closing. The tax is generally due at the time the deed is recorded with the local county office. This ensures that the tax obligation is met before the official change of ownership is legally documented.

A neutral third party, such as a closing agent, escrow company, or real estate attorney, usually facilitates the payment. This professional prepares the necessary documentation, which often includes a specific Real Estate Excise Tax Affidavit or similar form. This completed form, along with the deed and the tax payment, is then submitted to the appropriate county office, such as the county treasurer or recorder’s office. Upon successful submission and payment, the deed is officially recorded, and a tax receipt is typically issued, finalizing the excise tax obligation for the transaction.