OLR Research Report


October 22, 2010

 

2010-R-0430

OLR BACKGROUNDER: REAL ESTATE CONVEYANCE TAX

By: Judith Lohman, Assistant Director

With various exceptions, Connecticut law requires a person who sells real property for $2,000 or more to pay a real estate conveyance tax when he or she conveys the property. This report provides an explanation and legislative history of the tax; a comparison of Connecticut's tax with those in other northeastern states; and an overview of state revenue from the tax over the past 10 years and projections for the next four.

HOW THE TAX WORKS

The real estate conveyance tax has two parts: a state tax and a municipal tax. The applicable state and municipal rates are added together to get the total tax rate for a particular transaction. The combined rate is applied to the sale price. The seller pays the tax when he or she conveys the property. Municipal town clerks collect the tax and remit the state share to the state Department of Revenue Services (CGS 12-494 to 504h, as amended by PA 10-1, June 2010 Special Session).

State Tax

The state tax is 0.5% of (1) the first $800,000 of the sale price of a residential property and (2) the full sale price of unimproved land and certain bank foreclosures for mortgage delinquencies. A 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 (the so-called “mansion tax”).

Municipal Tax

In addition to the state tax, a seller must pay a state-specified conveyance tax to the municipality where the property is located. The municipal tax rate is 0.25% for all towns plus an additional tax of up to 0.25% in 18 eligible towns that choose 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.

Eighteen towns may adopt the higher tax rate and all 18 have chosen to do so. They are the 17 targeted investment communities (TICs) and one town that has a manufacturing plant that qualifies for enterprise zone benefits. The 18 towns are: Bloomfield, Bridgeport, Bristol, East Hartford, Groton, Hamden, Hartford, Meriden, Middletown, New Britain, New Haven, New London, Norwalk, Norwich, Southington, Stamford, Waterbury, and Windham. TICs are the 17 towns with enterprise zones. By law, these towns and the projects within them qualify for enhanced funding and other tax incentives (CGS 32-222 (u)).

The base tax rate of 0.25% for all towns expires on June 30, 2011. On and after July 1, 2011, the base municipal rate will be 0.11%, thus reducing the range of municipal tax rates to 0.11% to 0.36%, depending on location.

Exemptions

Many types of transactions are exempt from the real estate conveyance tax, including (1) transfers between spouses, (2) sales to certain nonprofit entities, (3) certain relocation company resales of residential property acquired through employee relocation plans, and (4) sale of the seller's principal residence by a deed in lieu of foreclosure or a “short sale” (a sale in which the price received is less than the total amount the seller owes on the property for mortgages and liens for municipal property taxes and utility or other charges that have priority over mortgage liens).

Examples

Table 1 shows the real estate conveyance tax payable on various hypothetical sales.

TABLE 1: STATE AND MUNICIPAL REAL ESTATE CONVEYANCE TAX ON CERTAIN HYPOTHETICAL SALES

Example

Sale Price

State Tax

Amount

(Rate)

Municipal Tax

Amount (Rate)

Total Tax

John and Mary sell their home in West Hartford.

$450,000

$2,250

(0.5%)

$1,125 (0.25%)

$3,375

Mia sells her house in Greenwich.

6,000,000

56,000

(0.5% < $800,000 + 1% > $800,000)

15,000

(0.25%)

71,000

Ed and Sally sell their Groton Long Point cottage.

950,000

5,500

(0.5% < $800,000 + 1% > $800,000)

4,750

(0.5%)

10,250

Bill sells his hardware store in Newington.

750,000

7,500

(1%)

1,875

(0.25%)

9,375

Joe sells his principal residence in New Haven for $10,000 less than the outstanding mortgage on the property.

150,000

0

0

0

REAL ESTATE TRANSFER TAXES IN OTHER STATES

According to a 2006 survey by the Federation of Tax Administrators, 35 states have real estate transfer taxes. Three states, California, Louisiana, and Ohio, impose only local taxes. The remaining 32 impose a state tax and some also allow localities to impose their own real estate transfer taxes.

Table 2 shows the state real estate conveyance taxes currently in effect in Connecticut and 10 other northeastern states. Unless specifically noted, the property seller pays the taxes.

TABLE 2: REAL ESTATE TRANSFER TAXES IN THE NORTHEAST

State

Tax Rate

Rate in Percent

Connecticut

0.75% to 1.5% of price, if price exceeds $2,000. Rate varies depending on property type and location.

0.75% to 1.5%

Delaware

2% to 3% depending on local tax rate, if price exceeds $100.

2%-3%

Maine

$2.20 per $500 of value conveyed. Tax liability is split between seller and buyer.

0.44%

Maryland

0.5% of price (0.25% for first-time Maryland homebuyers for a principal residence) plus county transfer taxes of 0.5% to 1%.

0.25% to 1.5%

Massachusetts

$2 per $500 of price plus a 14% surtax ($4.56 per $1,000); $3.42 per $1,000 in Barnstable County.

0.456% (0.342% in Barnstable)

New Hampshire

75 per $100 of price, with a $20 minimum if price is $4,000 or less. Tax liability applies to both seller and buyer.

1.5%

Table 2: -Continued-

State

Tax Rate

Rate in Percent

New Jersey

Basic fee: state rate = $1.25 per $500 of price; county rate = 50 per $500

Additional fee: 75 per $500 over $150,000

General purpose fee: 90 per $500 for the first $550K; $1.40 per $500 from $550K to $850K, $1.90 per $500 from $850K to $1 million, and $2.15 per $500 over $1 million

● Supplemental fee: 25 per $500 to 150K; 85 per $500 from $150K to $200K; $1.40 per $500 over $200K; plus an additional $1 per $500 up to $150K for transfers on which there is new construction

● Buyer fee: 1% of total consideration over $1 million for certain residential and farmland property

Maximum 0.975% if $1 million or less

New York

$2 per $500 of price and 1% on transfers over $1 million plus locally set taxes

0.4% to 1%

Pennsylvania

1% of price or fair market value plus local taxes of 1% to 3%

2% to 4%

Rhode Island

$2 per $500 of price ($1.40 per $500 for a mobile or manufactured home)

0.4%

Vermont

● Most property: 1.25% of price

● Principal residence: 0.5% for first $100K of price and 1.25% over $100K

● Qualified farm property: 0.5% of entire price

0.5% to 1.25%

Sources: “State Real Estate Transfer Taxes,” FTA Bulletin, Federation of Tax Administrators, February 1, 2006; CCH State Tax Guide, October 18, 2010.

LEGISLATIVE HISTORY OF CONNECTICUT'S TAX

1967 — Local Tax Enacted

The first conveyance tax was enacted in 1967 as a purely local tax (PA 693). All revenue remained with the towns. The tax rate was 55 cents per $500 of price (0.11%) for any property sold for at least $100. Town clerks could keep $1 from each conveyance in those towns where clerks are paid fees. The tax took effect January 1, 1968.

The legislature adopted the tax to supplant the federal Documentary Stamp Tax, which expired on December 31, 1967. It modeled the conveyance tax after the stamp tax, incorporating many of the federal law's provisions. The legislative record also suggests another reason for the tax was to encourage land preservation. During the House debate, Representative Weicker said that the tax would “enable municipalities to have additional funds for whatever they see fit,” but he hoped they would use the revenue to acquire open space. “With these funds in hand, it seems to me it offers a golden opportunity to the communities themselves to plow this back into the land for future generations,” he said (House Proceedings, June 5, 1967, p. 4520).

1983 — Combination State and Local Tax Enacted

Sixteen years later, in 1983, the legislature added the state component to the conveyance tax and established $2,000 as the minimum price for a taxable sale. It kept the municipal rate at 0.11% ($1.10 for every $1,000) and set the state rate at 0.5% of the sale price. Town clerks still collected the tax, but under the new law, they had to send the state's share to the revenue services commissioner within 10 days. The legislature enacted the new state tax as part of a larger revenue-raising package that included a tax on interest income and a surtax on inheritances (PA 83-1, June Special Session).

TAX CHANGES, 1983-2010

Rate

In the years since enacting the combined state and local tax, the legislature has made several changes in the state and municipal tax rates. These changes are summarized in Table 3.

TABLE 3: REAL ESTATE CONVEYANCE TAX RATE CHANGES 1983-2010

Year Enacted

Change

1986

Reduced state rate from 0.5% to 0.45% on property transfers occurring on or after January 1, 1987 (PA 86-397).

1989

Increased the state rates:

● on residential property sold for $800,000 or less to 0.5%,

● on property sold for more than $800,000 to 0.5% for the first $800,000 and 1% for the balance, and

● on nonresidential property to 1%, except for unimproved land (PA 89-251).

1991

Reduced the state tax rate from 1% to 0.5% when the following property on which mortgage payments are at least six months delinquent is conveyed to the financial institution holding the mortgage: (1) residential property valued at more than $800,000 and (2) nonresidential property other than improved land (PA 91-356).

1992

Extended the lower 0.5% rate to transfers of property to a financial institution's subsidiary under the same circumstances (PA 92-57).

2003

● From March 15, 2003 to June 30, 2004, increased the municipal tax from 0.11% to 0.25% of the sale price.

● Gave 18 towns, the option of increasing their municipal real estate conveyance tax rates by an additional quarter point to 0.5%, during the same 15-month period (PA 03-2).

2004

Extended the municipal rate increase for one year, until July 1, 2005 and made the optional 0.25% surtax for the 18 towns permanent (PA 04-216).

2005

Extended the higher municipal rate for two years, to July 1, 2007, and allowed the 18 town to add a lower surcharge up to 0.25% (PA 05-268).

2007

Extended the higher municipal rate for one year, until July 1, 2008 (PA 07-1, June Special Session).

2008

Extended the higher municipal rate again for two years, until July 1, 2010 (PA 08-1, June 11 Special Session).

2010

Extended the higher municipal rate for one year, until July 1, 2011 (PA 10-1, June 2010 Special Session).

Tax Base

In addition to the changes in state and municipal tax rates, the legislature enacted many tax exemptions in the years after 1983. In 2009, it extended the tax to property transfers occurring because of a court-ordered foreclosure by sale, but reversed itself in 2010. Year-by year changes in real estate conveyance tax exemptions are summarized in Table 4 (attached).

STATE REAL ESTATE CONVEYANCE TAX REVENUE SINCE FY 00

Revenue raised from the state real estate conveyance tax is deposited in the General Fund. According to the Department of Revenue Services (DRS), state revenue from the tax rose steadily from FY 00 to FY 06. Annual revenue for the decade peaked in FY 06 at $201.12 million and then dropped rapidly in FY 07 and FY 08. In FY 09, state revenue from the tax was $82.15 million, which is less than half of the FY 06 revenue (see Chart 1).

This drop was the result of a decline in both the number of taxable real estate transactions and the prices paid in those transactions (see Chart 2). The number of taxable conveyances reported by DRS in FY 09 (38,956) was 50.67% lower than the number occurring in FY 06 (78,963). In addition, a higher percentage of the total sales occurring in FY 09 were for lower prices, with 66.75% of the sales in FY 09 being for less than $300,000 compared to 58.15% in FY 06. There were only 2,331 sales for $800,000 or more in FY 09 compared to 5,730 in FY 06.

FY 10 revenue was $100.27 million, up 22% from FY 09 but still below FY 00's revenue of $113.64 million. The Office of Policy and Management/Office of Fiscal Analysis consensus revenue estimate issued on October 15, 2010 projects real estate conveyance tax revenue will grow by about 25% over the next four fiscal years, from an estimated $101.0 million in FY 11 to $125.4 million in FY 14 (see Chart 1).


Sources: Department of Revenue Services, Annual Reports FYs 02-09 and Monthly Comparative Statement of Tax Revenue, June 2010/June 2009 (Final); Office of Policy and Management and Office of Fiscal Analysis, Consensus Revenue Estimates, FYs 11-14, issued October 15, 2010.

Sources: Department of Revenue Services Annual Reports, 2005-06 and 2008-09.

TABLE 4: REAL ESTATE CONVEYANCE TAX EXEMPTIONS 1983-2010

Year

Enacted

Exemptions

1985

● Certain conveyances by those receiving benefits from the state's property tax relief programs for the elderly (tax freeze and circuit breaker programs)

● Court-decreed conveyances due to divorce or annulment, foreclosure of liens or mortgages on the property, or property partition between joint owners

● Inherited real estate

● Gifts between spouses or from parents to children

● Assignment for no consideration of life interest in real property or the unexpired portion of a life interest or interest for a specified number of years (PA 85-159, as amended by PA 85-469).

1987

Property sold or transferred for less than $2,000 on or after July 1, 1987 (PA 87-281).

1990

Property transfers between affiliated corporations that are federally tax-exempt, where one of the corporations owns or controls 100% of the other's stock or where a third corporation owns 100% of both (PA 90-315).

1991

Transfers:

● From a federally tax-exempt corporation to an affiliate, if (a) the transferee (i) is a corporation organized exclusively to hold property, collect income from it, and transfer the net income to another tax-exempt organization or (ii) has fewer than 36 shareholders, only one class of stock, and is organized exclusively to hold property, collect income from it, and turn the net income over to other tax-exempt organizations that are shareholders of the corporation or beneficiaries of the trust and (b) the transferor is tax-exempt under one of the above conditions or a charity

● Between federally tax exempt religious, scientific, public safety testing, literary, educational, amateur sports, or child or animal cruelty prevention corporation to another, whether or not the two are affiliated

● To nonprofit organizations holding undeveloped land in trust for conservation or recreational purposes (PA 91-403).

1993

● Transactions in a state-designated entertainment district (PA 93-311)

● All transfers between spouses, instead of only such transfers for no consideration (PA 93-389)

● Property transfers for a football stadium in Hartford and a football practice facility somewhere in the state (PA 93-1, September Special Session).

1998

● Land sold to investor-owned water companies and later classified as Class I or II watershed land (PA 98-157).

● In cases of property sold by a federally tax-exempt corporation to its tax-exempt affiliate, eliminated the requirement that, to be exempt, one corporation own 100% of the other or a third party own 100% of both (PA 98-244).

● Property transfers for the New England Patriots stadium, training facility sites, and the NFL pavilion (PA 98-1, December Special Session).

1999

Transfers:

● that only make a change of identity or a change in the property's form of ownership or organization, rather than in the beneficial ownership (PA 99-231) and

● for the Hartford sportsplex, parking facilities, and the convention center site (PA 99-241).

Table 4: -Continued-

Year

Enacted

Exemptions

2000

Property transfers related to the entire Adriaen's Landing site (PA 00-140).

2004

Qualifying employer and relocation company resales of residential property acquired through employee relocation plans (PA 04-154).

2009

Starting January 1, 2010, extended the tax to property foreclosed by sale through a court order (PA 09-3, June Special Session) (but see below)

2010

Starting October 1, 2010:

● Restored the exemption for transfers made pursuant to a foreclosure by sale

● Exempted from the tax transfers of a seller's principal residence when the transfer is (a) in lieu of a foreclosure or (b) a “short sale” (PA 10-1, June 2010 Special Session, 2).

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