It’s time to lower the state realty transfer tax
Delaware has the highest state realty transfer tax in the nation. That means more cash at the settlement table. That means fewer of our citizens can afford a home. That means those selling a home have less equity to move forward themselves. And when that happens, it means our state’s economy takes a hit.
The Delaware General Assembly raised the state realty transfer tax a full 1 percent in 2017 to counter a projected $400 million budget deficit. That 33 percent increase made Delaware’s state realty transfer tax - at 2.5 percent - the highest in the nation. Add to that the local transfer taxes, and individuals may have to pay as much as 4 percent of the property’s value at settlement - in cash. That is cash required to meet transfer taxes alone, over and above settlement costs, making it hard for Delawareans to own a home and ultimately dealing a blow to the real estate market and our state’s economy.
A realty transfer tax is, in essence, a discouragement tax. Taxes levied on cigarettes and alcoholic beverages are intended to discourage consumption, and the state realty transfer tax does exactly the same thing. It raises the price of real estate, reducing affordability. Buyers have to use cash resources otherwise meant for a down payment or home improvements to pay the realty transfer tax. The seller’s cash reserves are also depleted, making it hard for them to purchase a replacement home or property.
As a Realtor in Delaware, I have personally seen the impact of the 4 percent realty transfer tax on the lives of property buyers and sellers. When qualifying a buyer, that buyer may have great credit and the ability to make a monthly mortgage payment but lack the cash necessary to pay the realty transfer tax to complete the purchase. Further, in the current market climate, most sellers are not even considering buyers who may need settlement assistance. The buyer is then forced to choose between not purchasing, purchasing something smaller at a lower price, purchasing something inferior at a lower price, or continuing to rent.
The impact is starkly apparent when we consider the market activity following the increase in the realty transfer tax as well as how Delaware compares with neighboring states. Research by Econsult Solutions Inc. in 2019 revealed that residential sales prices in neighboring counties in Pennsylvania and Maryland have exceeded the sales prices in Delaware since the realty transfer tax was increased in 2017.
Beyond the burden on homebuyers, our neighbors also enjoy a competitive advantage on economic development opportunities. The realty transfer tax does not distinguish between residential and nonresidential property. Thus, employers weighing real estate acquisitions in Delaware versus Maryland, Pennsylvania, or New Jersey may not find Delaware appealing.
Discussion of the state realty transfer tax must also consider its sensitivity to market fluctuations. The realty transfer tax is an extremely unreliable source of revenue to a local or state budget. Declining property sales caused by declining wages or increasing unemployment translates into unrecoverable tax revenues. The revenue from Delaware’s realty transfer tax fell from $137 million in FY 2006 to $50 million in FY 2011 at the end of the recession, before bouncing slowly back in FY 2017. This is a 63 percent decrease in revenue, and a strong indicator of the sensitivity of realty transfer tax revenues.
The COVID-19 pandemic, as many know, has greatly impacted the real estate market nationwide, and there is a major shortage of inventory; housing prices are going up and homes are staying on the market for shorter periods of time. The average housing price in Delaware has increased by around 6.1 percent compared to 2019, meaning most buyers must pay more in realty transfer taxes. This puts the dream of owning a home out of reach for many who don’t have the cash to compete.
Homeownership invigorates our economy. Each purchase of property creates a ripple effect as homebuyers purchase furniture, appliances, landscaping services, and more.
Homeownership contributes to the health of services such as insurance, banking, legal and brokerage. Homeownership creates opportunities in the trades with home improvements, renovations, restorations, and enlargements.
Most importantly, homeownership is the very foundation of the American dream. Homeownership strengthens communities, supports healthier families, and lays the foundation for our future.
The Delaware Association of Realtors believes that repealing the 1 percent increase in the realty transfer tax in this legislative session is the single most important move they can make to stimulate homeownership, ensure Delaware’s economy has a chance to remain vibrant, strengthen our communities statewide, and establish a more equitable and reliable funding source for vital programs and services needed by everyone in the First State.
This is the third consecutive year of projected budget surpluses, and our state government is more solvent than ever before.
The opportunity to correct this situation confronts us with the safest of margins. Lower the state’s portion of the realty transfer tax to 1.5 percent, returning it to the level it was before the increase in 2017, which was enacted to close a temporary budget gap. Now is the time to act.