What is a real estate transfer tax?
A real estate transfer tax (RETT) is a one-time tax on the transfer of property from one owner to another. There are 38 states that have some form of a RETT, whether its imposed from the state or a local government. Most RETTs have a flat fee structure, however a few major cities in the US impose a graduated RETT, including San Francisco and New York City. Evanston even approved a referendum in November 2018 to institute a graduated system.
RETT in Chicago
The current RETT in Chicago is a flat .75%, which the seller pays. The revenue from this tax (projected $160MM in 2019) goes to Chicago's Corporate Fund. For example, a seller would owe $3,750 for a $500k house.
There have been talks in recent years to institute a graduated RETT which would both raise additional revenue and lower the tax burden on the majority of residents. Mayor Lightfoot has made this a focal point in her efforts to lower the deficit for next year. Under her proposal, houses sold for less than $500k would actually pay a much lower rate at .55%, and the top out at 2.55% for property values over $3MM. This would generate an additional $100MM/year for Chicago while lowering the tax burden for the vast majority of residents - 85% of homes sold in Chicago were valued at less than $500k.
Pros and Cons of a Graduated RETT
Pros:
- Ease tax burden on the majority of residents, while relying more on wealthier home buyers
- Additional revenue for public services
- A graduated rate would take advantage of growing property values in wealthier areas
Cons:
- The revenue may be unreliable in an economic downturn
- A graduated rate could disincentivize developers and could reduce the number of transactions in the market
- Sellers could circumvent the rate by lowering the sale price
- Can contribute to urban sprawl if buyers focus only on cheaper housing
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