Setting the record straight on how the District taxes home sales

February 8, 2013

This week, Harvey S. Jacobs answers readers’ questions from his mailbag.

I was recently at a wine tasting and overheard a real estate agent say that when you sell a house or condo in the District, the District government collects a tax of 5 percent of the selling price. I bought a condo in the District in 2005 as an investment. Even though it was reasonably priced, today I would not be able to sell it for what I paid for it. The 5 percent off the top seems excessive in this case. Do you know any way around having to pay this fee?

I believe you misunderstood what that real estate agent was talking about. There is no 5 percent D.C. tax on the sale of a home. The District does collect a transfer tax and a recordation tax. Traditionally, the seller pays the transfer tax and the buyer pays the recordation tax. That split is, of course, fully negotiable in your sales contract.

For residential property, the District collects taxes on either the assessed value or the sales price, whichever is greater. If that amount is less than $400,000, each tax is imposed at 1.1 percent. If the amount is $400,000 or more, each tax is 1.45 percent. The taxes are collected at settlement and calculated usingD.C. tax form FP 7/C. That form must be signed by both buyer and seller, notarized at settlement and presented to the recorder of deeds when recording the deed and deed of trust. Copies of the form are available on the Web site of the D.C. Office of Tax and Revenue.

So, for example, if you were selling a home for $400,000, your transfer tax would cost you $5,800. Assuming you’d agreed to split these taxes, your buyer would pay the same amount in recordation tax. If, on the other hand, you agree to reduce your sales price to $399,000, your transfer tax is $4,389, and your buyer would pay $4,389 in recordation taxes.

At settlement, the seller will incur other costs. The District’s recorder of deeds collects fees to record your deed and the buyer’s deed of trust, if the buyer is borrowing funds. Those fees are $156.50 for each document. Sellers should expect to pay a reasonable settlement fee to an attorney for preparing and recording the deed. That fee generally ranges between $250 and $550. There may also be bank wire fees of approximately $35 for wiring payoff funds for your existing mortgage and for delivering your sales proceeds.

The settlement attorney will pay off your mortgage, but that does not let you off the hook. Upon request, your lender is required to provide a written document releasing its lien of record. The lender has 30 days after being paid to provide that documentation in recordable form, either a deed of release or a certificate of satisfaction. Your lender will typically record that document directly with the recorder of deeds.

Less often, your lender may send the release document to your settlement attorney, or to you. If your lender sends the original release to you, it needs to be recorded. Your settlement attorney will be happy to do that. Your title will be free and clear only when one of those release documents is recorded at the recorder of deeds. Forms for a deed of release and certificate of satisfaction can be found on the Office of Tax and Revenue Web site.

Perhaps what your wine-tasting real estate agent was referring to was the commission that a seller typically pays to his listing real estate broker for selling his home. Real estate brokers’ sales commissions are always negotiable. They have generally been approximately 6 percent of the sales price. That 6 percent is often split equally between your broker (the listing broker) and the broker who brings the buyer to the transaction (the selling broker). If your listing broker also brings the buyer to the transaction, he might be willing to reduce his overall commission to 5 percent of the sales price because he doesn’t have to split it with another broker.

If you’re buying another home and agree to use your broker for that transaction as well, you may be able to negotiate a commission discount. Those negotiated terms, among others, should be spelled out in the written listing agreement that your broker will ask you to sign before he starts to market your home.

Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord settlement attorney and lender. This column is not legal advice and should not be acted upon without obtaining legal counsel. Jacobs can be reached at harvey@
harveyjacobs.com
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