Simply put, a property transfer tax is a tax that is charged when the title to property passes from one person to another one.
When you look at the property transfer tax in the narrow sense, we can say that it is simply the transaction fee that needs to be paid when the title of property moves from one entity to a different one.
One of the things that make the property transfer tax different is that it is only applied where you need to register the transfer according to the law. These include transfers of real estate, bonds or even shares. Some of these taxes may differ in the form they present to you. Some of the property transfer taxes can be charged using a real estate transfer tax, stamp duty, and even levies for the formal registration of a transfer. In some cases, you may need to turn into a notary so he can confirm the transfer of property. One important thing to keep in mind is that, even though you will need to support the notary fees, these are not included on the transfer tax that you need to pay.
As soon as you gain an interest or buy a property that is registered at the Land Title Office, you will be the one responsible for paying the property transfer tax as well as you will also need to fill out a proprietary transfer tax return. Note that in most cases, the transfer of a property needs to be completed by a legal professional.
Some taxable transactions include:
- life estate
- transfer of fee simple
- foreclosure
- lease or lease modification agreements
- agreement for sale or right to purchase
- escheat, forfeiture or quit claim
- Crown grant
- transfers that result from a corporate reorganization.
How Much Do You Pay?
The price that you need to pay depends on the fair value of the property – both lands and respective improvements. This is the value that is included at the date of registration with the Land Title Office.
In case you’re a foreign corporation, a foreign national or a taxable trustee, you will need to pay the additional property transfer tax on residential property transfers.
Since property transfers are audited regularly, the audit may determine that you need to pay more tax. In that case, you will receive a notice of assessment and you should make sure that you pay as soon as you can since it will continue to add additional interest. In the case that you believe you don’t owe any extra property transfer tax, you can file an appeal.
One of the mistakes many people do is that they tend to confuse property transfer tax with annual property charges. However, these are different. In fact, these are the taxes that you need to pay on an annual basis for each property that you own or, at least, have a registered interest in.
The Different Tax Rates
As you can imagine, the property transfer tax varies depending on the value of your new property. Here are the different tax rates that can apply:
- 1% on the first $200,000.
- 2% on the portion of the fair market value greater than $200,000 and up to and including $2,000,000.
- 3% on the portion of the fair market value greater than $2,000,000, and
- if the property is residential, a further 2% on the portion of the fair market value greater than $3,000,000.
If the property is classified as residential and farm, or is residential mixed class (such as residential and commercial), you pay the further 2% tax on only the residential portion of the property.
Determining How Much You Will Pay
The truth is that there is nothing better than an example so you can fully understand how much you will need to pay for the property transfer tax.
#1: Assuming that you bought a home with a fair market value of $650,000:
In this case:
- 1% on the first $200,000 = $2,000
- 2% on the remaining $450,000 = $9,000
- $2,000 + $9,000 = $11,000
You will need to pay a tax of $11,000.
#2: Assuming that you bought a home with a fair market value of $4,500,000:
In this case:
- 1% on the first $200,000 = $2,000
- 2% on the portion greater than $200,000 and up to and including $2,000,000 = $36,000 ($2,000,000 – $200,000 = $1,800,000 X 2% = $36,000)
- 3% on the portion greater than $2,000,000 = $75,000 ($4,500,000 – $2,000,000 = $2,500,000 X 3% = $75,000)
- A further 2% on the portion greater than $3,000,000 = $30,000 ($4,500,000 – $3,000,000 = $1,500,000 X 2% = $30,000)
- $2,000 + $36,000 + $75,000 + $30,000 = $143,000
You will need to pay a tax of $143,000.
The Fair Market Value
As you can see, in order to know exactly how much you need to pay for the property transfer tax, you need to know the fair market value. Simply put, the property transfer tax is the price that would be paid if there were a purchaser and a seller interested in making business for a specific property, in the open market, on the date of registration.
So, as you can see, it is important to make a distinction between open market transfers and non-open market transfers:
#1: Open Market Transfers:
A property transfer can be considered an open market transfer in case there is someone who is likely to be interested in the property and can make an offer. This is the case when you have a home and you decide to advertise it for sale.
In this case, the purchase price is the fair market value as long as the sale contract is closed within months. In case this doesn’t occur, there will be the need to change the fair market value. Some of the circumstances that can lead to this change include:
- a change in the conditions of the property
- a significant change in value
- when you didn’t purchase the property in the open market
#2: Non-Open Market Transfers:
When a property transfer doesn’t occur in the open market, there is the need to determine the fair market value of the property using other tools. These can include:
- the property valuation
- a recent independent appraisal
Note that the first tool can’t be used in all circumstances. So, whenever there are:
- changes in the market conditions in the area of the property
- changes in the property itself such as rezoning
- the land is now considered farm land
- there are additional or new construction on the site,
this value can’t be used.