September 13, 2006
REAL ESTATE CONVEYANCE AND CAPITAL GAINS TAXES
By: Judith Lohman, Chief Analyst
You asked for an explanation of Connecticut's real estate conveyance tax, including recent temporary increases and legislation to extend the expiration of the increases. You also asked for information about federal legislation to extend the current 15% federal tax rate on long-term capital gains.
CONNECTICUT REAL ESTATE CONVEYANCE TAX
With some exceptions, Connecticut law requires a person who sells real property for $2,000 or more to pay a real estate conveyance tax when he conveys the property to the buyer. The tax has two parts: a state tax and a municipal tax. The state tax rate is either 0.5% or 1% of the sale price, depending on the type of property and how much it sells for, and the town tax rate is either 0.25% or up to a maximum of 0.5% depending on where the property is located. The applicable state and local rates are added together to get the total tax rate for a particular transaction. The seller pays the tax when he conveys the property (CGS § 12-494-504h).
The state tax is either 0.5% or 1% of the total sales price, depending on the type of property. The tax is 0.5% on (1) residential dwellings sold for $800,000 or less, (2) other types of residential property, (3) unimproved land, and (4) bank foreclosures for mortgage delinquencies. The 1% rate applies to (1) sales of nonresidential property other than unimproved land and (2) any portion of the sale price of a residential dwelling that exceeds $800,000.
Many types of transactions are exempt from the tax, including transfers between spouses, sales to certain nonprofit entities, and certain relocation company resales of residential property acquired through employee relocation plans.
In addition to the state tax, sellers must pay a municipal real estate conveyance tax. The municipal tax rate is currently 0.25% for all towns plus additional tax of up to 0.25% for 18 eligible towns that chose to impose the increased rate. Thus, the municipal tax rate can range from 0.25% to 0.5%, depending on where the property is located.
The law allows 18 towns to adopt the higher tax rate. They are the targeted investment communities and a town that has a manufacturing plant that qualifies for enterprise zone benefits. As of November 29, 2005, 17 of these towns had imposed the higher rate: Bloomfield, Bridgeport, Bristol, East Hartford, Groton, Hamden, Hartford, Meriden, Middletown, New Britain, New Haven New London, Norwalk, Norwich, Southington, Waterbury, and Windham. Stamford is the only authorized town that has not increased its rate.
Legislative Action on Rate Increases
Recent legislative action on the real estate conveyance tax has focused on the municipal portion of the tax. Prior to March 15, 2003, the municipal tax was a flat 0.11% of the sale price regardless of the town where the property is located. But in 2003, the General Assembly (1) temporarily increased the municipal tax rate in all towns to 0.25% and (2) temporarily gave 18 towns the option of adding 0.25% for a total rate of 0.5%.
Under the 2003 law, all the municipal tax rate increases were to expire on July 1, 2004. But in the 2004 session, the General Assembly (1) extended the temporary increase in the basic municipal tax rate for another year, until July 1, 2005, and (2) made the optional higher rate in the 18 towns permanent (PA 04-216). In 2005, the General Assembly extended the increase in the basic municipal rate for an additional two years, until July 1, 2007. It also allowed the 18 towns to add up to 0.25% to the basic rate instead of requiring them to add either a flat 0.25% or nothing (PA 05-268). Thus, under current law, as of July 1, 2007, the basic municipal rate is scheduled to drop from 0.25% to 0.11% and the rate in the towns with the higher rate is scheduled drop from a maximum of 0.5% to 0.36%.
FEDERAL CAPITAL GAINS TAX RATE
In 2003, Congress reduced the maximum income tax rate on most capital gains from 20% to 15% for noncorporate taxpayers. The lower rate applies to distributions from long-term capital gains (gains from assets held for longer than one year) that occur after May 5, 2003. For taxpayers in the two lowest income tax brackets (10% and 15%), the 2003 law reduced the tax rate on long-term capital gains from 10% to 5% for the 2003 through 2007 tax years and to zero for the 2008 tax year.
These reduced capital gains rates were slated to expire on December 31, 2008. But Section 102 of the Tax Increase Prevention and Reconciliation Act of 2005, signed into law on May 17, 2006, extended the 2008 rates for an additional two years, until December 31, 2010. Thus, for the 2008, 2009, and 2010 tax years, the maximum long-term capital gains tax rate will remain at 15% and while lower-income taxpayers will pay no tax on such gains.