"In this world nothing can be said to be certain, except death and taxes," Ben Franklin once famously said. Yet when it comes to taxes on real property � especially for first-time homebuyers � we find much uncertainty and confusion exists.
Homebuyers should expect to pay two main types of taxes on their homes, 1) transfer taxes are non-recurring and paid once at settlement and 2) real property taxes are recurring and paid semi-annually (when you pay depends on where you live).
Transfer Taxes
Aside from the down payment, transfer taxes are often the single largest expense a homebuyer will pay at settlement. Transfer taxes are also known as recordation taxes, stamp taxes or grantee taxes but are all lumped together on the HUD-1 settlement statement and identified, collectively, as "Transfer Tax."
For example in Montgomery County, Maryland, a homebuyer will customarily pay one-half of the total county transfer tax, state transfer tax and recordation tax. The total of these three taxes will be collected as a single line item on the HUD-1 and called "Transfer Tax."
Even more confusing in the District of Columbia and Virginia, the law requires homebuyers to pay the "Recordation Tax," yet federal regulation requires those recordation taxes to be lumped together and identified on the HUD-1 as "Transfer Tax."
For the purpose of this discussion, the term "Transfer Tax" will include any and all one-time, non-recurring, taxes customarily paid by the homebuyer at the time of closing.
Transfer taxes vary depending on where the property is located, which may lead some homebuyers to think they are being penalized if purchasing a home in a city or county with a higher transfer tax rate, such as the District of Columbia.
While it's true that transfer taxes for DC properties are significantly higher than in Maryland or Virginia, the overall amount a homeowner will pay in taxes evens out over time thanks to property tax rates.
Property Taxes
Homeowners are typically expected to pay their property tax bill in two installments spread over the year. (For a summary of real estate tax rates by jurisdiction, including when property tax payments are due, see the homebuyer tax section of our website.)
As mentioned above, the District of Columbia may have one of the region's highest transfer tax rates, but it also boasts the region's lowest property tax rate at just $0.85 per $100 of assessed value. In Bethesda, Maryland the property tax rate is $1.027 per $100 of assessed value, while homeowners in Arlington County, VA pay $0.958 per $100 of assessed value.
Tax Comparison
Let's see how the taxes shake out for a homeowner in Washington, DC versus Bethesda, MD versus Arlington, VA over the course of 10 years, assuming tax rates remain unchanged. Remember: "Transfer Taxes" include ALL state recordation taxes and state/county transfer taxes as customarily apportioned, by jurisdiction, between the homebuyer and seller.
This figure also assumes that the purchase 1) is an owner-occupied residential purchase and, 2) that the homebuyer is a first-time homebuyer. Let's use $500,000 as our purchase price with 20 percent down:
�
Total taxes paid (estimate)
$500,000 purchase price
| Jurisdiction | Transfer taxes | Property taxes
| Total
|
District of
Columbia
| $7,250.00 | $36,762.50 | $44,012.50 |
Bethesda,
Maryland | $4,052.50 | $51,350.00 | $55,402.50 |
Arlington,
Virginia | $2,999.70 | $47,900.00 | $50,899.70 |
As you can see, the total amount of transfer tax plus property taxes paid over 10 years is far less in the District of Columbia compared to Maryland and Virginia.
This is partly because of the lower annual tax rate of just $0.85 per $100 of assessed value, and largely due to the Homestead Deduction, which homeowners qualify for so long as the property is their principal residence. Individuals who own multi-unit dwellings with five or less units also qualify for the deduction so long as they occupy one of the units.
Now, let's try the same thing, only this time we'll use $300,000 and $700,000 price points:
�
Total taxes paid (estimate)
$300,000 purchase price
Jurisdiction
| Transfer taxes
| Property taxes | Total
|
District of
Columbia | $3,300.00 | $19,762.50 | $23,062.50 |
Bethesda,
Maryland | $2,362.50 | $30,810.00 | $33,172.50 |
Arlington,
Virginia | $1,999.82 | $28,740.00 | $30,739.82 |
�
Total taxes paid (estimate)
$700,000 purchase price
Jurisdiction
| Transfer taxes
| Property taxes
| Total
|
District of
Columbia | $10,150.00 | $53,762.50 | $63,912.50 |
Bethesda,
Maryland | $6,052.50 | $71,890.00
| $77,942.50 |
Arlington,
Virginia | $4,999.58 | $67,060.00 | $72,059.58 |
First-time Homebuyers
Homebuyers who have not owned property in Maryland and the District of Columbia may be exempt from paying their portion of transfer and recordation taxes. Unfortunately for Virginia homebuyers, no tax incentive exists.
To qualify for the transfer tax exemption in Maryland, all buyers must be first-time homebuyers. So, for example, if a wife owned a condo prior to marriage and now wants to purchase a house with her husband who is a first-time homebuyer, the exemption would not apply.
Furthermore, if you are purchasing as a "first-time homebuyer," and you intend to take title in the name of your revocable trust, or another type of entity, you will not qualify for the tax exemption in Maryland.
In the District of Columbia, the program is known as DC Tax Abatement, and, for a purchase price of $332,000 or less, it provides an exemption from the DC 1.1% Recordation Tax and an allowable credit from your seller(s) of 1.1% equal to the DC Transfer Tax. This is a 2.2% swing in favor of the homebuyer!
Additionally, the DC Tax Abatement program excuses first-time homebuyers from having to pay real property tax on their property for five years beginning October 1 following the date of closing. To qualify,� first-time homebuyers must 1) prove they live in DC, 2) must not have owned a property in the District for one year prior to the closing date, 3) meet the income requirement and 4) meet the purchase price requirement.
In sum, homebuyers can expect to pay two kinds of taxes on their property: transfer taxes and property taxes. Even though transfer taxes may be higher from one jurisdiction to the next, it doesn't necessarily mean a homebuyer is guaranteed to pay more taxes over the course of his/her ownership. First-time homebuyers may be eligible for tax exemptions.
For more information on taxes paid at settlement or during the course of homeownership, please contact the team at Federal Title.
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