Knowing what's expected of you at the time of closing on a property will protect you from financial surprises. Each state is allowed to determine its own taxes. Kentucky, for example, has an income tax while Tennessee does not. In the State of Tennessee, a transfer tax is collected anytime anything of value is exchanged for the transfer of real estate. It's a hefty tax that can add thousands to the final cost. For this reason, understanding the Tennessee state transfer tax is a critical piece of information for anyone involved in the buying or selling of real property in Tennessee. Understanding how Tennessee real estate transfer tax and exemptions are applied will help you avoid financial surprises.
Federal and State Regulated Taxes
Before diving in, let's take a look common taxes levied in the U.S. at both a federal and state level.
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Income Tax - This tax can be charged at a federal, state, and local level. Structures vary, but not every state or local government requires an income tax. Tennessee is one of the few states with no state income tax. In 2014, an amendment to the Tennessee State Constitution was passed which bans an income tax being levied against earned income.
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Sales Tax - There is no federally regulated sales tax, but most states impose one on their residents. Rates vary per state and county.
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Property Tax - A tax based on the property's market value. Applied often to real estate, it can also be levied against other property such as cars.
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Estate Taxes - According to the IRS, an estate tax is "a tax on your right to transfer property at your death."
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Transfer Tax - Regulated by states and counties, a transfer tax is applied to real property as it changes ownership. Tennessee is one of the states that imposes a transfer tax.
What is the Real Estate Transfer Tax in Tennessee?
There are some decisions given to states when it comes to taxes, and the real estate transfer tax is one of them. The state of Tennessee imposes this tax on those who are buying a property. Payment of the tax takes place when you close on a property or when you record a mortgage. The amount of the tax is based on a percentage of the purchase price for the home or property. The Tennessee transfer tax is collected when the deed is recorded with the local register of deeds office.
How Real Estate Transfer Tax Affects Pricing
The Tennessee Real Estate Transfer Tax is codified at Tennessee Code Annotated § 67-4-409. TCA 67-4-409(a) and requires that “all transfers of realty, whether by deed, court deed, decree, partition deed, or other instrument evidencing transfer of any interest in real estate” are subject, upon recordation, to a tax of $0.37 per $100.00 (the “Transfer Tax”) calculated based on the greater of “the consideration for the transfer;” or “the value of the property” (“Transfer Tax Formula”) (emphasis added).
Simply put, you can estimate spending $0.37 per $100 of your property value. You can calculate this by multiplying .0037 times the purchase price. For example, if you were to buy a home at $250,000 you would pay $925 in transfer tax.
Why Understanding Transfer Tax is Important
A well-known, local restaurant in Tennessee had been a popular tourist destination for years. When the owners decided to sell, some of the property included framed and autographed photos of famous people from all over the world.
A portion of the purchase price was allocated towards the real estate, and the rest was assigned to the assets of the restaurant, including furniture and inventory. Because the transfer tax is paid on “the value of the (real) property,” the tax was reduced because of the significant value of the inventory and reputation of the restaurant.
The Effects of Tennessee Transfer Tax
It's important to note, during the sale the buyer usually signs the “affidavit of consideration” on the deed. On this affidavit, someone is stating under oath the value of the consideration paid for the property being sold. A false statement could arguably lead to a charge of perjury. In addition, it is possible the local tax assessor may suspect a false statement on the affidavit of consideration if the actual property value is far more than the amount stated on the affidavit.
Let's continue with the local Nashville restaurant as an example. For the purpose of this exercise, let's say the restaurant and the land upon which it sat was valued at and sold for a total of $10 million. If a determination were made that the real estate was sold for $1 million and the restaurant with all its inventory and good name was sold for $9 million, the transfer tax would be $3,700. If the tax were paid on the entire purchase price of $10 million, the tax would come to $37,000.
Tennessee Transfer Tax Exemptions
There are some exemptions to transfer tax in Tennessee. No transfer tax should be paid on the transfer of a leasehold estate or levied on the creation or dissolution of a tenancy by the entirety, deeds of division in kind of realty formerly held by tenants in common, release of a life estate to the beneficiaries of the reminding interest, deeds executed to implement a testamentary devise, domestic decrees, transfers of real estate to a revocable living trust, or deeds executed by the trustee of a revocable living trust to implement a testamentary devise by the truster (Tennessee Code Title 67. Taxes and Licenses § 67-4-409). No oath of value is required in transactions that are exempt from tax.
Real Estate Attorney in Nashville, Tennessee
As you contemplate the purchase or sale of real property in Tennessee, it would be wise to consider consulting with an experienced Nashville real estate attorney. We can advise you as to the best steps you can take not only to protect yourself but also to minimize your costs. A little bit of work on the front end could save you a lot of money. At Rochford Law & Real Estate Title, we have the expertise to resolve all matters of residential and commercial real estate law and help you with real estate title and closing.
