What are Transfer Taxes and how can they help pay for growth?

Q: What is a transfer tax (aka: land transfer tax or real estate transfer tax)?

A: A transfer tax is a fee on all real estate transactions involving land, new residential or commercial construction, and existing residences. It is paid every time a deed changes hands. For new development, it is paid when a developer buys land, when lots with utilities and streets are sold to builders, and when builders sell new homes, office buildings or shopping malls. For those already owning a home, the only transfer tax that would be paid is when your house is sold.

 

 

Q: How can a transfer tax help pay for growth?

A: Fast growing areas like Wake County need new infrastructure to keep up with more people. One of the biggest needs is building public schools (Wake will need 33 new schools in by 2025), which are primarily funded through property taxes. The building, buying and selling of real estate is linked to growth, so the transfer tax would be an additional way to help pay for growth’s needs (like schools) without increasing the property tax on existing homeowners. And of course, prospective businesses and residents are attracted to areas with strong public schools and good infrastructure. In Wake, a 1% TT would have generated as much revenue in 2007 as a property tax increase of 15-20 cents.

Q: Is a transfer tax a new tax on homes?

A: The only tax on homes is the property tax, paid by all homeowners every year. A transfer tax would only be paid at time of real estate transfer, and it would be an extension of the existing deed stamp excise tax of 2%.

Q: Where else is the transfer tax (TT) used?

A: All over the world. Thirty four U.S. states have a TT. In several states it is higher than the 1% proposed in most legislation. Delaware, with a growth rate close to NC, has a TT rate that is 2-3 times higher than has been proposed in some NC counties. Six counties in NC have had a separate 1% TT for two decades and are benefitting because it’s funding local schools and local roads. These counties have prospered and continue to grow. Dare County, has the lowest property tax rate in the state, 26 cents versus Wake’s 60.5 cents, in part due to the TT.

Q: Who actually pays the transfer tax?

A: It depends. Who pays the sales tax when you buy a pair of shoes? In real estate negotiations, the buyer usually pays the costs. In the strong markets typical of high growth areas of NC, buyers will treat the TT just as they would a real estate broker’s commission, they will add it on to their asking price, allowing growth to pay for growth. Remember that quality schools, roads and other infrastructure paid for by a TT help keep the real estate market strong.

Q: Who is NCAR and why do they oppose the transfer tax?

A: The NC Association of Realtors (NCAR) represents thousands of realtors across the state, and they oppose the transfer tax because realtors make commissions from home sales. All realtors must pay a fee to NCAR annually in order to access the MLS online database of properties for sale (a fee opposed by many realtors). NCAR’s PAC (political action committee) far outspends all other PACs in the state, giving hundreds of thousands of dollars to state and local candidates each election. NCAR recently spent $10 million to defeat local transfer tax referenda in several NC counties, so they are very politically influential.

Q: What transfer tax legislation was approved by the NC General Assembly?

A: In 2007, the NC General Assembly passed a law empowering counties to raise new revenues for needed infrastructure by either levying a 0.4% transfer tax or a 0.25% sales tax if approved by voters in a local referendum. As a result of intense political pressure by the NC Realtors’ PAC, the legislation was reversed in 2011. Unfortunately, this revenue generating tool is not a current option in most of North Carolina.