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Real Estate Transfer Taxes

A real estate transfer tax is a tax levied on the sale of certain classes of property -- residential, commercial or industrial -- that increases with the size of the property being sold. Sometimes sellers (who have typically seen the value of their homes rise over the years) foot the bill. Other times the cost is imposed on buyers who, it is argued, are making an investment in the future of a community.

Tax rates and dispositions vary from state to state: some states have no real estate transfer tax enabling legislation; some direct the revenues to the state general fund (although collection remains a county responsibility); and still others give local governments the authority to collect and keep tax revenues. North Carolina cities must get special legislative approval for the tax; Maryland and Florida led the way in requiring that a portion of the funds raised be used for land conservation. Now it is common in states and communities to use proceeds to establish dedicated funds for natural resource protection and mitigation, and parks and open space. ¹⁹

At the local level, the real estate transfer tax can create substantial funds for park and open space acquisition, particularly in fast-growing communities. On the other hand, it can also inflate real estate values and slow the market. Since revenues from the tax fluctuate with the real estate market, income can be difficult to predict. In addition, winning approval in the face of special interest opposition has proven to be a stumbling block for some communities.

That was the case in Cape Cod, Massachusetts, a fast-growing region that has been a battleground over real estate transfer taxing authority. The fight began in November 1996, when 80 percent of all registered voters in Barnstable County turned out to pass a home-rule petition requesting from the legislature the authority to levy a real estate transfer tax. Proceeds were to be used to establish a land bank which would fund open space acquisition. The measure won with 55 percent of the vote and special enabling legislation was approved that allowed 15 Cape Cod communities to impose a 1 percent tax on the sales of homes . The tax was to be paid by the seller. The legislature then overrode a veto by the governor and sent the issue back to Cape residents for a second vote. Faced this time around with well-organized and well-financed opposition from the state realtors association, the measure was defeated. Nantucket, with a 2 percent tax on transfers, and Martha's Vineyard are currently the only communities in the state that have been given the authority for such a program.

In Block Island, Rhode Island, however, realtors supported a 2 percent transfer tax to fund open space, understanding the link between Block Island's natural beauty and their business profits.¹⁹ Voters joined in support of the 1985 measure by passing the tax at the ballot box, then increased it four years later to 3 percent. To protect middle-income, first-time homeowners, the first $75,000 of the purchase is exempted. The tax and bonds backed by the tax have generated millions for open space protection.

A few years after Rhode Island, Washington State passed its own real estate transfer tax enabling legislation. The 1990 legislation allows for a tax on real property, paid by the seller, with proceeds directed to local capital projects. A separate provision allows counties to levy an additional excise tax, with voter approval, to raise funds for the acquisition and maintenance of conservation areas. This tax is the obligation of the purchaser; the rate of this tax cannot exceed 1 percent of the selling price. To date, four counties have attempted to win voter approval for this tax but only San Juan County has been successful.