|Private Transfer 'Tax' on Some New Homes
Buying a new home? Read the title documents very carefully. There may be a little-known tax tucked inside. It will lie dormant until you sell the property, then escrow will collect up to 1.75 percent of the sales price for a Private Transfer Tax.
“Wait!” you say, “Only governments can tax.” A new day is dawning. Developers are beginning to insert a deed restriction that requires a percentage of the profits to be paid each time the property changes hands. And who will receive the money? A fund set up by the developer, administered and dispersed without public oversight and with little control over the amount, use and cost of administering.
This is not a fee for service, like monthly homeowners associations charge. Nor is it a supplemental tax like Mello-Roos and other special assessments. Private transfer taxes are the result of a deal between the builder and groups – or cities – whose opposition potentially could hold up construction for years. The private transfer tax ensure one party, perhaps an environmental group, gets money in the future in exchange for not blocking the development.
The private transfer tax is a relatively new phenomenon in Southern California and at least one Inland Empire builder now is adding it to new home deeds. Often, the tax is not collected on the first sale, so if you do not read the preliminary title documents very carefully, you may miss it. Your Realtor should not. (The services of a Realtor who is not connected with the builder is highly recommended.)
Builders say the private transfer tax will be used to support environmental projects, parks, charities that most people would endorse gladly. Indeed, the California Building Industry Association and the Sierra Club and other environmental groups teamed up last year to support a California Assembly bill that would give legal credence to the private transfer tax.
The bill failed, as did an Assembly bill to prohibit such taxes. It was a 2007 legislative draw, but the issue will arise again. The California Association of Realtors strongly opposed the tax in 2007 and can be expected to keep the issue in the public eye.
Back in the model home showroom, a home buyer can be forgiven for not noticing the presence of this stealth tax. Written into the deed by the builder, it kicks in with the second sale (the one after the builder is the seller) and is assessed every time the property changes hands for the period of time specified by the builder, which is generally somewhere between 20 years and the end of time. You won’t know about it unless you read the preliminary title report very carefully, especially the small print.
The future home seller who must compete for buyers with properties that don’t have the private transfer tax clearly will be at a disadvantage. The list price for the two homes will have to be comparable, meaning the seller who must pay the private transfer tax will net less from the sale after it is paid.
If you are shopping for a new or previously owned home, call me at (909) 261-3541. As a full-time, full service Realtor, I study real estate trends and the local housing market every day. I know my fiduciary duty is to my client alone, and I anticipate future problems – such as the private transfer tax – so you can decide whether to proceed with the purchase or look elsewhere.