What Is Conveyance Tax? A Real Estate Investor's Guide

After spending what may feel like a small fortune on a new property, buyers are hit with closing costs. These costs can be substantial, which adds to the challenge of purchasing a property. Before diving into a real estate transaction, either as the seller or the buyer, it's important to understand all associated fees. One cost that is often overlooked is the conveyance tax.

While a lucky few may avoid conveyance tax altogether, others may end up paying this tax to the state, county, and even the city. Your conveyance tax liability could range from $0 to tens of thousands of dollars, so it pays to know your area's laws.

If you understand what a conveyance tax is, who pays it, and how to calculate it, you'll have a much better idea of what to expect when it comes time to close the deal.

What is conveyance tax?

A conveyance tax is a tax paid on the real estate transfer process (also called "conveyancing") and levied by the state, county, or local municipality. The amount of conveyance tax paid is typically based on the sale price of the property, and the tax rate varies between different states and counties.

Depending on the area, the conveyance tax may be a flat fee, a percentage of the sale price, or a set rate per $100, $500, or $1,000 of the sale price. However, some states don't charge a conveyance tax at all.

The conveyance tax is also often referred to as a real estate transfer tax or documentary transfer tax. The term used may vary depending on the state.

A conveyance tax may be imposed on any type of real property, depending on the state. This means a real estate conveyance tax may have to be paid whether the property is vacant land, a residential property, or commercial real estate.

Who pays conveyance tax?

There is often a question as to which party is responsible for paying the conveyance tax, the buyer or the seller. Some states have rules regarding who's responsible for the tax, but most states don't care who pays it as long as it's paid. Even in states that don't have a rule as to who pays the transfer fee, it's usually customary for it to come out of the seller's proceeds.

If the real estate sale is handled by a title company, the transfer tax will usually be paid out of the sale proceeds at closing. In other cases, the conveyance tax will have to be paid to the town clerk when the deed is filed.

Whether the conveyance tax gets paid by the buyer or seller, it's important to negotiate this piece of the deal before signing the purchase agreement. Conveyance tax liability could be a significant amount of money in some states, so it's best not to wait to negotiate who's paying at the closing table or town clerk's office.

How to calculate conveyance tax on a real estate transaction

How the conveyance tax is calculated also depends on the city, county, and state where the property is located. In most cases, you'll only be looking at a county and state or even just a state conveyance tax. However, some cities charge a municipal conveyance tax as well.

For instance, the City of Chicago charges a local conveyance tax of $5.25 per $500 of the sales price. That's quite significant considering the State of Illinois only charges $0.50 for each $500.

Calculating the tax rate for property sold in Arizona is quite simple, because the state simply charges a flat $2. However, most states base their conveyance fee on the sales price of the property. For instance, Michigan charges a transfer tax of $7.50 per $1,000. If a property is sold in Detroit, a tax of $1.10 per $1,000 would also have to be paid to Wayne County in addition to the state tax. Here's how you would do the math:

Purchase price: $120,000

State conveyance tax: $7.50 per $1,000

County conveyance tax: $1.10 per $1,000

Total conveyance tax: $8.60 per $1,000

Since the tax is per thousand, you would divide the purchase price by $1,000

$120,000 / $1,000 = 120

$8.60 x 120 = $1,032

So, in this case, a conveyance tax of $1,032 would have to be paid when the deed is filed.

Now let's say it is a multifamily property being sold for $5 million in the same city. The conveyance tax on that deal would be $43,000. This is a great example of why you want to calculate the tax amount ahead of time and agree on who's paying it before sitting down at the closing table.

In most states the conveyance tax is paid when the deed is recorded, so what does this mean on deals that involve a land contract?

Since a deed isn't typically recorded until the land contract is paid off, the transfer tax isn't paid until then either. This is important to understand, especially if the land contract doesn't have a balloon payment. The seller could be stuck paying out of pocket for the conveyance tax after they receive their last payment if they're not prepared.

The bottom line

Unfortunately, there's no clear-cut answer as to how much the conveyance tax on a real estate transaction is going to be or who's going to pay it. The most important thing to take away is that you'll want to find out early on in a deal what the tax rate is in your area and how many levels of conveyance tax will have to be paid on the deal. You also want to establish who's going to be responsible for it to avoid any last-minute surprises. We all know that real estate transactions come with enough of those as it is.