October 5, 2010

Documentary Transfer Tax

In a California home purchase, there is the inclusion of a fee in the transaction known as the documentary transfer tax. Rev & T C §11911. 

The deed, the document which denotes the identity of the seller and buyer, must show the amount of the documentary transfer tax due. Rev & T C §11932. The tax rate is $0.55 per $500 of value (0.11 percent) sold. Rev & T C §11911. 

For example, if a house was sold for $500,000, then the documentary transfer tax would be $550. Hence, the documentary transfer tax is not prohibitively expensive. Although in some locations where the city documentary transfer tax is quite high, such as Berkeley and Oakland, the tax can be burdensome.

Each county or city, or both, may impose a documentary transfer tax. Rev & T C §11911. For example, the County of San Mateo imposes a documentary transfer tax as does the City of San Mateo. This means that a home sale in the City of San Mateo would result in both a city and county documentary transfer tax.

In terms of payment of the tax, the seller and buyer are responsible for the tax. Rev & T C §11912. However, it is customary for the seller to pay the tax.

The reason why the documentary transfer tax is relevant for estate planning purposes is because it is common for an estate to include a home. Since the transfer of a home requires the execution of a deed, the documentary transfer tax becomes an issue, albeit only superficially. 

For instance, if a person creates a trust they would need to execute a deed transferring ownership of the home from themself into the trust. However, California law states that a transfer of a home to a living trust is exempt from the fee imposed by the documentary transfer tax. Rev & T C §11930. Similarly, California law states that if a daughter inherits a home from her mother through probate, the deed transferring ownership of the home from mother to daughter would not require a documentary transfer tax payment because the transfer was the result of inheritance not a sale. Rev & T C §11930.