What Business Owners Need to Know About California's Documentary Transfer Taxes

May 9, 2014

Documentary transfer taxes are something any small business owner needs to consider when making real estate decisions for the business. Each municipality may have different taxes, and tax codes change over time, so before making any final decisions about your business, you should speak with a licensed Oakland real estate attorney. However, the following basic principles can help you understand what documentary transfer taxes are and why you should consider them in any real estate deal.

On a very basic level, documentary transfer taxes are taxes levied on the documents related to real estate transfers. California law allows the board of supervisors of any county or combination of a county and city to impose these taxes on deeds or other writings that transfer real estate so long as the value of the interest in the property being transferred is at least $100. The tax authorized by the state is 55 cents for each $500 of value. Compared to some other states, this tax is relatively low.

The city government may also levy a tax of up to one half of the amount the county is allowed to tax the documents. This is why these taxes can become a little confusing–some cities have opted to enact their own taxes and some have not. As local governments find themselves struggling to pay for services, more and more of them have enacted this type of tax.

There are a wide variety of exemptions from this tax that usually don't apply to a small business owner but could in some circumstances, which is another reason to speak with a lawyer before entering into a transaction. State law also says that while leases are not normally subject to this tax, one can be if the lease is for such a long period of time that it approximates a transfer of the property.

Some cities have enacted additional similar taxes. California law has authorized them to do so. In November of 2008, San Francisco voters passed an ordinance that increases the transfer tax on real estate worth more than $5 million. The proposition passed by the voters also included some tax breaks for sales of residential property that had solar energy systems or earthquake safety improvements.

Counties where there are special concerns include Los Angeles, Santa Clara, Alameda, Contra Costa, Marin, Riverside, Sacramento, Solano, Sonoma, and Yolo, and there are additional city taxes in the cities of Santa Monica, Pomona, and Redondo Beach.

As explained on the very helpful website of the Sacramento County Clerk and Recorder, these taxes are paid when the document transferring the property is recorded. The tax can be paid by the buyer or the seller, but there must be a mutual agreement between the parties as to who will be paying the tax. The document in which the property is sold will include a tax declaration on the very first page.

Depending on where your business is or will be located, different taxes will apply when the real estate is sold. Particularly when dealing with high value real estate, these taxes can amount to real sums of money, so they should definitely be a concern when negotiating a sale.