Contributed By Allen Matkins Leck Gamble Mallory & Natsis LLP
When real estate is sold, it incurs transfer taxes when a new deed is recorded. A transfer tax may also apply if a controlling interest in the entity that owns the real estate is transferred. This local tax varies by jurisdiction, and may be quite high in certain cities, such as San Francisco and Los Angeles.
Unless otherwise agreed to contractually by the parties, transfer taxes are paid by the selling party.
Any appreciation or gain will generally be subject to state and federal taxes. Who pays that tax is determined by the ownership structure.
Gain from the sale of real estate is generally subject to federal and state income taxes when it is sold. The gain is generally the difference between what the asset sold for and the amount paid to acquire it. Who pays that tax is determined by the corporate structure. Gains may be subject to deferral to the extent a successful 1031 exchange is completed.
The gain will be taxed at either capital gains rates or ordinary income rates for federal income tax purposes. The highest capital gains rate is 20%. In general, the capital gains rate will apply if the property is not owned by a corporation and is held for more than a year in a taxpayer’s trade or business or for investment purposes. California state income tax rates do not differentiate between capital and ordinary gains, and the highest rate at which real estate gains could be taxed is 13.3%. Cities and counties in California do not generally have additional income tax on gains from the sale of real estate.
Generally, California real estate is reassessed for property tax purposes when it is sold. Property taxes are roughly equal to 1% of the purchase price of the asset. State property taxes are paid annually, in twice-yearly instalments, to the local county assessor.