D.C. First-Time Home Buyer Program: Transfer Tax Reduction

D.C. First-Time Home Buyer Transfer Tax Reduction Program

D.C. Transfer Tax Reduction Program for First-Time Home Buyers

It’s no secret, the high cost of real estate in Washington, D.C. makes it very difficult for most First-Time Home Buyers to purchase a home.  When buying a home, you not only need to figure out a way to make a down payment, but you also must pay closing costs.  For most properties in DC, closing costs total over 3% of the property sales price of which half comes from one charge – Transfer and Recordation Taxes!

Fortunately, the Finance and Revenue Committee brought forward much needed relief to help promote home ownership in the District by rolling out the “Reduced Recordation Tax Rate for First-Time Homebuyers.”  

To qualify for this program, you must meet several criteria:

  1. The property must be your first owner occupied home in Washington, D.C.
  2. Property Sale Price must be less than $647,000
  3. Meet the household income limits set by the program guidelines

Unfortunately, many people miss out on the savings because the team representing them (Realtor and Lender) fail to mention it, or they think their income exceeds the program limits!  In this article, you will learn how to qualify for the program, calculate the savings and most importantly, understand the income limit loophole! 

What is Transfer Tax?

We are all quite familiar with local sales tax.  When you buy dinner, groceries, gas, the local government taxes you on the cost of your goods.  Transfer Tax is basically a sales tax on the sale of the home.  In DC, the transfer tax is 1.1% of the sale price up to $400k and 1.45% for prices over. The seller pays an identical amount which means the total revenue for the district is 2.2% – 2.9% of the sale price for every house sold. 

In March of 2019, the median sale price was $575k giving the District $16,675 in revenue per home sold.   In the same month, 676 homes were sold, bringing in over $11M of tax revenue.  You can now see why many economists say “Housing is the foundation of the economy!”  

How much will you save with this program?

With the transfer tax reduction, the tax is reduced to just .725% of the sale price for the buyer.  This constitutes of savings of .35% for homes priced up to $400k and .725% for homes priced between $400,000-$647,000.  If we use the median price of $575k, the average homebuyer would save $4,168! 

What are the requirements?

There are three primary requirements for the tax reduction program. 

First Time DC Homebuyer – The buyer must be or intend to be a District resident and have never owned a house, condo or co-op unit that qualified for the District’s homestead deduction as the applicant’s primary residence.

Property Price Eligibility – the price of your home must be less than $647,000

Household Income Limits – The program is designed to help those who have income less than the median household income.  It is important to realize that the income limit is not what you make today, it’s actually not even what you “earned” last year!  Read below for more details on analyzing income.  

Persons in Household / Income Limit

One Person Household – $153,000

Two Person Household – $174,780

Three Person Household – $196,560

Four Person Household – $218,340

Five Person Household – $235,980

Six Person Household – $253,440

Seven Person Household – $270,900

Eight Person Household – $288,360

 Loop Hole Alert

From time to time, I speak with clients who clearly look like they do not qualify for the program.  For instance, the income limit for a single person is $153,000 so if you currently make $175k (or even $500k), it’s easy to think you would not qualify.  The catch is that you must understand the period analyzed and the difference between “Earned Income” and “Adjusted Gross Income.”

To qualify for the Tax Reduction, the DC Government will review your most recent filed tax return.  Simply look at line 7 on the front of your Federal Tax Return (Adjusted Gross Income) and compare that number to the income limits for the program. 

Adjusted Gross Income is determined by taking your total earned income and subtracting contributions to your pre-tax retirement contributions.  As an example, if you made $165,000 in 2018 but put $18,000 in a traditional 401k, your adjusted gross income would be $147,000…which means you qualify even though you really make more money!  Take that a step further, you could have just received a promotion to make $500k per year in 2019 but if your adjusted gross was less than the limit in 2018, you would still qualify for the savings! 

What is the Approval Process?

 Of all the First-Time DC Homebuyer Programs that exist, this one is by far the easiest.  Once you are under contract, notify your selected settlement company to let them know you would like to take advantage of the Transfer Tax Reduction Program. They will have you fill out the application and supply your most recent year’s Federal Tax Return.  Just like that, you will be approved, and they will allow for the tax reduction on your final settlement statement!

If you have any questions about this First-Time D.C. Home Buyer program, please do not hesitate to reach out.  I continue to hear stories of people who missed out on this program because they thought they made too much, or it wasn’t even presented to them as an opportunity by the industry professionals!  You can give us a call at 202.899.2600 or book a consultation using our digital calendar

I’m John Downs of The Downs Group at MVB Mortgage, a top mortgage lender in the D.C. / Baltimore Metro Market.  My passion is to educate all types of homebuyers to unlock their wealth potential in life!

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