November 23, 2004
REAL ESTATE CONVEYANCE TAX
By: Judith Lohman, Chief Analyst
You asked (1) for an explanation of the real estate conveyance tax, (2) how the revenue from the tax is used, (3) how the real estate transfer taxes on Nantucket and Martha's Vineyard differ from Connecticut's tax, and (4) whether any legislation similar to the Nantucket and Martha's Vineyard taxes has been proposed in Connecticut.
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 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).
State and municipal real estate conveyance tax revenue goes to the state's and the appropriate municipality's general fund and, as such, is used for general state and municipal operations.
Martha' s Vineyard and Nantucket each impose a 2% municipal real estate transfer tax. The major differences between these taxes and Connecticut's municipal real estate conveyance tax are (1) the islands' tax rates are four times higher than the highest Connecticut rate and (2) part of the revenue from the island taxes is earmarked for open space purchases, while in Connecticut all revenue goes to a municipality's general fund.
A total of eight bills have been proposed in the Connecticut General Assembly since 1999 to establish programs similar to the Martha's Vineyard and Nantucket taxes to fund open space. None of the bills was enacted. One was favorably reported to the Senate floor but did not come up for debate. The others died in committees.
REAL ESTATE CONVEYANCE TAX
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. 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%.
The 18 towns authorized to adopt the higher tax rate are the targeted investment communities and a town that has a manufacturing plant that qualifies for enterprise zone benefits (PA 03-2). As of November 23, 2004, 16 of these towns have imposed the higher rate: Bloomfield, Bridgeport, Bristol, East Hartford, Groton, Hamden, Hartford, Meriden, Middletown, New Britain, New London, Norwalk, Norwich, Southington, Waterbury, and Windham. The two that have not increased their tax rates are New Haven and Stamford.
Under the 2003 law, all the municipal tax rate increases were to expire on July 1, 2004. But in 2004, the General Assembly extended the temporary increase in the basic municipal tax rate for another year, until July 1, 2005. It also made the optional higher rate in the 18 towns permanent (PA 04-216). Thus, under current law, on July 1, 2005, the basic municipal rate will drop from 0.25% to 0.11% and the rate in the towns choosing to adopt the higher rate will drop from 0.5% to 0.36%.
USE OF REAL ESTATE CONVEYANCE TAX REVENUE
The state's share of the revenue from the real estate conveyance tax goes into the state's General Fund. State law requires the municipal share to become part of the general revenue of the municipality in which the tax is paid. The only exception is the requirement that, in towns where the town clerk is paid from fees, the clerk must receive $1 of the revenues for each taxable transfer deed, instrument, or other document the clerk records (CGS §12-499).
TRANSFER TAXES ON NANTUCKET AND MARTHA'S VINEYARD
Both islands impose a 2% transfer tax on property sales. Half of the tax (1%) goes to the town general fund and half to a local land bank commission to fund open space purchases and associated expenses. The 2% rate is four times higher than the highest municipal rate in Connecticut.
Like Connecticut, Massachusetts also has a state real estate transfer tax. The state tax rate is 4.56% (3.42% in Barnstable County), including a 14% surcharge. Thus, the total real estate conveyance tax on Nantucket and Martha's Vineyard is 6.52% ($6.52 for each $1,000 of the sale price) compared to maximum total tax rate in Connecticut of 1.5% ($1.50 per $1,000).
In addition to the higher tax rate, the other major difference between Connecticut's tax and the Nantucket and Martha's Vineyard taxes is that a portion of the latter is earmarked for municipal open space purchases, while Connecticut law specifies that revenues from the municipal share of the tax must become part of the town general revenues.
LEGISLATIVE PROPOSALS TO LINK CONVEYANCE TAX AND OPEN SPACE PURCHASES
Since 1999, eight bills have been introduced in the General Assembly that would have earmarked a share of real estate conveyance tax revenues for open space land acquisition. None was enacted. The bills are briefly summarized below and copies are enclosed.
SB 524 – An Act Concerning Funding for Local Open Space Acquisition – Allows municipalities to use revenue from the real estate conveyance tax to acquire open space.
Ø Finance, Revenue and Bonding Committee – No action
sSB 1223 – An Act Concerning Imposition of a Real Estate Conveyance Tax By Municipalities – Allows municipalities to impose an additional tax of up to 0.25% on real estate conveyances to be used as follows (1) a municipality that meets legal requirements for affordable housing can use 100% of the revenue for acquiring open space or use half for economic development and half for open space and (2) a municipality that does not meet affordable housing standards must use at least 50% of the revenue for affordable housing and no more than 50% for open space.
Ø Planning and Development Committee Joint Favorable Substitute – Recommitted by Senate, 6/7/99.
sSB 6810 – An Act Authorizing Municipalities to Impose a Real Estate Conveyance Tax – Identical to sSB 1223 described above.
Ø Planning and Development Committee Joint Favorable Substitute Change of Reference to Finance, Revenue and Bonding Committee.
Ø Finance, Revenue and Bonding Committee - No Action.
HB 5383 – An Act Concerning Funding for Open Space and Recreational Land – Among other things, allows towns to impose a real estate conveyance tax of up to 0.5% and earmarks resulting revenues for acquiring open space, parks, and brownfields clean-up.
Ø Environment Committee – No Action
SB 249 – An Act Concerning the State Portion of the Real Estate Conveyance Tax – Municipalities retain the state share of the real estate conveyance tax and use the money to acquire open space.
Ø Finance, Revenue and Bonding Committee – No Action.
SB 552 – An Act Concerning the Preservation of Open Space – Add 0.5% to the real estate conveyance tax to fund open space acquisition.
Ø Environment Committee – No Action.
SB 995 – An Act Concerning the Real Estate Conveyance Tax – Allow municipalities to earmark up to 25% of real estate conveyance tax revenue for an open space acquisition fund.
Ø Environment Committee – No Action.
HB 5918 – An Act Authorizing Municipalities to Tax Conveyances of Real Estate – Allow municipalities to impose a conveyance tax and use revenues from the tax to maintain open space and clean up brownfields.
Ø Planning and Development – Public Hearing; No Action.