Transfer taxes are a levy imposed by both Los Angeles County and the city when the property’s title is transferred. This seemingly straightforward concept is not as clear-cut as it seems, though. A layer of complexity is added since different municipalities charge different rates. There is also confusion regarding who pays the tax.
You cannot do much to avoid the tax, but at least you will have forewarning in order to prepare yourself.
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How much is the tax?
Los Angeles County and the city impose a transfer tax of $0.55 per $500 (or $1.10 per $1,000) and $4.50 per $1,000, which is based on the sales price excluding the value of any lien remaining. If this amounts to $300,000, the county would impose a $330 transfer tax ($300,000 divided by $500, times $0.55). The city charges an additional $1,350 ($300,000 divided by $1,000, times $4.50). This includes all of the roughly 70 neighborhoods within the city, such as Bel-Air, Brentwood, Downtown Los Angeles, and Sherman Oaks.
Other cities in the county similarly charge a transfer tax. Culver City levies the same $4.50 per $1,000 of value. Santa Monica’s rate is $3.00, while Pomona and Redondo Beach each charge $2.20.
Who pays for it?
In California, the transfer tax is typically borne by the seller, although this not written in stone. While it is nearly always the case, the seller may wish to negotiate this point, depending on market conditions. A buyer may offer to pay part or all of the tax in order to gain a competitive advantage.
The county has exempt transactions. There are several situations where the seller or buyer does not have to pay a transfer tax. These include a divorce situation where title transfers from one spouse to the other, changing the manner in which the title is held, conveyance to secure or satisfy a debt, when there is nothing exchanged in return (i.e. a gift), or upon death. Additionally, if the liens total more than the value of the property, there is no transfer tax imposed.
If the property involved is being transferred to an entity taxed as a partnership, there is typically no transfer tax. This could happen when foreign ownership is involved.
Condos and co-ops
The county charges the tax on the consideration of the interest or real property conveyed. This covers both condos and co-ops, although the latter is not as nearly as popular as you will find in New York City.
You need to examine the sales agreement and closing documents closely. Otherwise, the seller and his/her agent might have shifted the tax burden to you, the buyer. In this case, you unwittingly will owe the tax.
Whoever bears the tax, it is not tax deductible on your federal income taxes. However, if you are the buyer and pay the transfer tax, you can add it to your cost basis, reducing the capital gains tax when you sell the property. Should the seller pay the tax, he/she can use this amount to lower the sales price, and, hence, compute a lower capital gain.