Here’s a Great Way Commercial Real Estate Investors Can Lower Their Real Estate Transfer Tax Burden
The real estate transfer tax is levied when real property, including commercial real estate, changes hands. There are only about a dozen states that don’t have a real estate property tax, yet counties and municipalities within those states may still impose their own transfer tax. The odds are high that, if you are buying or selling commercial property, you will have to pay a transfer tax.
That is why it’s so important to ensure that you don’t make an easily avoidable mistake: overpaying your transfer taxes.
The High Costs of the Real Estate Transfer Tax
Transfer taxes are typically levied as an “ad valorem” tax, which means they are based on the purchase price of the property.
Depending on your state, transfer taxes for real estate may be called property transfer taxes, real estate conveyance taxes, mortgage recording taxes, recording fees, deed taxes, stamp taxes, or other similarly opaque names.
No matter which name your local government uses, you can trust that transfer taxes will add a significant amount to closing costs. Often these costs apply to both the buyer and the seller. Both parties’ combined transfer tax obligation can easily grow to hundreds of thousands of dollars.
What Will You Pay?
Commercial real estate transfer taxes vary greatly between states, counties, and municipalities. Your taxes will differ based on your property’s location.
For example, there are no state transfer taxes in about a dozen states including New Mexico, Alaska, and Texas, but local governments in these states may still impose their own taxes. The state of California’s transfer tax rate is 0.11%, but San Francisco’s combined city and county tax rate adds 6% on to that.
Often, governments will levy tiered taxes on commercial and residential properties, popularly known as the “mansion tax.” This increases the tax rate in stages as the property cost increases, burdening a $10 million property with a higher transfer tax rate than a $5 million property. Since commercial properties are often valued in the hundreds of millions, transfer taxes are almost always guaranteed to add significant expense to a transaction.
In November 2022, the City of Los Angeles passed a ballot measure that imposed a new 4% real estate transfer tax for properties worth more than $5 million. For property worth more than $10 million the rate increased to 5.5%. Both of those are in addition to the existing 0.56% combined city and county taxes, as well as the state tax.
The Problem for Commercial Real Estate
Basing a tiered tax on a property’s purchase price poses an intensified problem for many commercial real estate transactions because exempt personal property, such as furniture, fixtures, and equipment, are usually included in the purchasing cost. As a result, hotel, restaurant, and casino sales are especially vulnerable to transfer tax overpayments.
Fortunately, you can lower your transfer tax rate by correctly documenting the value of your property’s personal property, which is exempt from the transfer tax.
How a Transfer Tax Reduction Study Can Reduce Your Costs
By commissioning a Transfer Tax Reduction Study before closing, commercial property investors can reduce their transfer tax liability. These studies provide a detailed, fair market appraisal of real and personal property to be included in the transaction, so you can ensure an accurate valuation of your expected transfer taxes.
It is important to note that you must commission your Transfer Tax Reduction Study before closing because you cannot get a refund on overpaid transfer taxes.
Learn More About Transfer Tax Reduction Studies from Paragon International
Serving clients since 1985, Paragon International, Inc. provides independent, impartial and accurate cost segregation analyses, and property valuations and appraisals to assist in and support decisions related to taxes, risk management, investment, financing and corporate planning. Our consultants have extensive fixed asset experience – they’re fixed asset experts. Because of that we are able to offer a unique combination of irreplaceable human resources and advanced technology. We have specialists experienced in valuing closely-held securities, patents and other intangible assets, business enterprises, buildings, equipment and real estate. In addition, Paragon provides complete inventory and asset management services and solutions, including software customization and training, barcode labels and scanners, and tailored inventory services such as data conversion and integration, asset inventories, asset policies, cost reconciliation, and appraisal services. Contact Paragon International to discover how we can help you.
