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Taxing the Poor Through Real Estate Transfers

This Article collects data on real estate transfer taxes in Illinois. It shows that municipal transfer taxes are more likely to affect poor communities than affluent communities.

Taxing the Poor Through Real Estate Transfers

Illinois residents are often surprised to learn that they have to pay tax to sell their house. Homeowners correctly assume that they will not owe any federal tax based on the income they receive from the sale of their property.1 But they tend to forget that federal income tax is only one tax among many. So homeowners tend to be startled to find themselves liable for tax on the transfer of their residence. The State, as well as various counties and municipalities, impose so-called “real estate transfer taxes” (“transfer tax” or “transfer taxes”) on almost all sales of real property. Transfer tax is, in effect, a sales tax. For the most part, sales tax is regressive: it applies equally to all demographics and affects most those who have the least. When buying a T.V. in Chicago, for example, the purchaser pays not just the list price of $500, but also $51.25 in sales tax (10.25%). This $51.25 will “cost” more—as a percentage of total income—for a resident making $40,000 per year than for a resident making $80,000.

Sales tax rates differ by county and municipality; transfer tax rates do as well. Unlike sales tax, however, transfer tax affects a limited number of counties and municipalities, and often comes with legal and administrative strings beyond simple payment. More problematically, though, the selective nature of transfer tax amplifies its regressive effect. Many communities with the highest rates of transfer tax have residents who are least likely to be able to afford the extra expense. This Article collects data on all municipality transfer stamp requirements, focusing on single-unit residential sales.2 It shows that less-affluent communities are often asked to pay for this additional expense more often than their comparatively wealthier counterparts. Although not all municipalities that impose transfer taxes have a lower-income population, the finding raises questions about how local municipalities, particularly those in less-affluent areas, tax their resident’s most valuable asset.

What is Transfer Tax and How is it Assessed?

Transfer tax is a sales tax on real property. By statute,3 and often municipal ordinance,4 property cannot be transferred until the tax is paid, the relevant authority issues a “stamp,” and the stamp is affixed to the deed prior to recording. The stamp is evidence that title has been transferred properly.5

In Illinois, transfers of real property are taxed at one, two, or three layers.6 At the first layer, the State taxes all non-exempt property at a rate of $1 per $1000 of the sales price.7 The second layer consists of the tax charged by each county. Although not every county charges transfer tax,8 all those that do tax at the same rate of $0.25 per $500 of the sales price.9

Table 1. County Transfer Taxes, Amount and Responsibility

When we reach the last layer of tax, the municipality, tax rates vary. As Table 2, below, shows 88 municipalities impose some form of transfer tax.10

Table 2. Municipalities That Charge Transfer Tax and/or
Inspection Fees

Most municipalities charge tax at a rate of between $2 to $4 per $500, or what amounts to between 0.40% to 0.80% of a property’s purchase price.11 For those that charge a transfer tax, the average tax rate is 0.33% of the purchase price. And in all but 20 (23%) municipalities, transfer tax is the seller’s sole responsibility.12

Not only that, but some municipalities add on other charges, such as inspection and reinspection fees.13 And some charge no transfer tax but require an inspection to transfer the property. For single family homes and condos, inspection fees range from $5014 to $410.15 Often this does not include the cost of reinspection. Given that minor items that have no impact on the property are often included as “violations,” the actual cost of inspections and “compliance” is higher.16 In these circumstances, inspection requirements act, de facto, either as part of the transfer tax, or as separate transfer tax when none is technically imposed. Matteson, for example, imposes no transfer tax. But the Seller must pay $75 for a pre-sale inspection before the seller can legally transfer the property.17 So although Matteson does not charge a de jure transfer tax, the $75 inspection fee acts as a de facto one.

Of the 88 municipalities that charge a stamp or require an inspection, 33 (38%) require an inspection (either in conjunction with the stamp or as a stand-alone requirement).18 Table 3, below, shows that the median household income is $51,166 in municipalities that require inspections. That number rises modestly to $55,457 if we average the median household income data for the same municipalities.

Table 3. Income of Households, by Inspection Requirements

This contrasts with communities that require transfer stamps but do not require inspections. In these municipalities, the median household income is $64,824, and jumps to $71,210 if we average all median incomes in those municipalities.

How do these numbers compare to the median household income of all Illinois residents? The answer is not promising for those who are short on cash. Table 3 shows that the mean household income for Illinois residents is $85,262;19 the median household income is $61,229.

Table 4. Mean and Median Income for Illinois Residents

Of the 33 municipalities that require an inspection,20 only 9 (27%) have median incomes above the median household income for all Illinois residents.21 That number drops to 6 (18%) when asking whether the municipality that requires an inspection has a mean household income at or above the state average.22 The majority of inspection fees, in other words, are being assessed by municipalities whose residents are not well-positioned to afford them.

Inspection fees are not always separate from transfer stamps. As mentioned above, some municipalities require both transfer tax and inspections. And when they do, residents of lower-income communities feel the effects most sharply.

The impact is hard to understand unless we use concrete numbers. One helpful way of doing this is by asking how much tax a resident pays as a percentage of their median household income. We can estimate the income of any given household using its median income. Then, using the median home sale price in the municipality, we can divide the total amount of transfer tax (stamps and inspection fees) by the median household income in that municipality. Of the 88 communities that required transfer stamps, 10 (11%) imposed taxes equal to or greater than 2% of the median household income of a municipality’s residents. Only 3 of these 10 municipalities—Oak Park, Evanston, and Bolingbrook—had median household incomes above the State’s median household income.

Table 5: Transfer Tax as Percentage of Median Household Income, 2% and Above

As Table 5 demonstrates, Chicago is the leading taxing municipality—and it does not require inspections.23 It is also the most complicated because it has such a diverse population base. And the transfer tax is not paid entirely by the seller.24 The complexity of the city’s demography makes drawing conclusions about its transfer tax less certain. But the median household income for Chicago residents is below the Illinois median. And this is true for 7 of the 10 (70%) municipalities in which the transfer tax rose above 2% of the median household income of its residents.

To provide some context, imagine you live in Harwood Heights. When you sell your house, you can expect to pay over 5.037% of your household income in tax. And this comes on top of the State and County transfer tax, which, using the median sale price, comes to $281 (State) and $141 (County). All told, your transfer tax bill will be $2,991, which is approximately 5.86% of your total income.25

The story is similar, if somewhat less pronounced, for the municipalities that tax at 1%–2% of their residents’ median household income. There are, as Table 6 shows, 28 municipalities that charge transfer taxes amounting to between 1.005% and 1.918% of a resident’s median income, which represents 31% of all municipalities charging transfer tax.

Table 6: Transfer Tax as Percentage of Median Household Income, 1%2%

Only 10 (36%) of those communities fall above the median household income level for Illinois residents generally. This means that in 18 (64%) municipalities residents had a median income below Illinois residents generally.

Although transfer tax rates of 1%–2% of resident median household income are not isolated, the most common rates of transfer tax occur between 0.00001% and 1% of median household income. In this band of taxation there are 50 municipalities, 28 (56%) of which had median household incomes above the Illinois median.26 This means that municipal transfer taxes tend affect most those who have the least.

Where Does the Money Go?

Since quite a bit of money is flying around, it is natural to wonder where it all goes. The money from State transfer taxes is, by statute, earmarked for specific property-related projects.27 This was not always the case. Until 2003, revenues from transfer taxes flowed directly into the State’s general fund.28 By and large, counties and municipalities have not followed the State’s lead. County codes typically provide that the proceeds from transfer stamps be deposited into the general treasury.29 Municipal codes have similar provisions.30 This raises questions about how county and municipal bodies are spending the money generated from transfer stamps.

Why Do Transfer Taxes Exist?

Raising these questions usually generates three responses. The most obvious reply is that transfer taxes are a source of revenue. Illinois has never been shy about taxing, and transfer stamps and inspections are just different mechanisms for doing more of the same. But just because a state or municipality can impose additional tax does not mean that it should. To justify a transfer tax, the taxing body must, at a minimum, provide at least one reason for imposing it. With respect to transfer taxes, two come to mind.

One relies on a public safety argument. Transfer taxes, the argument goes, pay for the services needed to ensure all property is safe and suitable for occupancy.31 Pre-sale inspections and stamp requirements prevent the degradation of property and ensure safe housing for all residents. The fees generated from inspections and transfer taxes help fund the inspectors that perform these functions.

It is not clear, however, that either transfer taxes or pre-sale inspection requirements actually improve the quality (or even prevent the degradation) of municipal residential housing stock. For one thing, the revenues generated by transfer taxes and inspections are not earmarked to improve housing stock, to pay inspector salaries, or to otherwise prevent property dilapidation. For all we know, they are used to furnish the office of the building commissioner. For another, we have no evidence about whether these inspections improve safety or housing quality. Additionally, many of the municipalities that have the highest transfer taxes have the worst housing stock as measured by home values.32 Finally, longtime Illinois residents can recount stories of businesses and homeowners whose projects were delayed or canceled, or whose property was cited for frivolous violations, by politically-driven inspections. These anecdotes may or may not be isolated occurrences. But at the very least, they tell us that Chicago and other municipalities have used inspections for reasons other than safety and the public welfare.

Even so, there is one final argument to justify transfer taxes. And, at first blush, it is rather compelling. Transfer tax offers a guaranteed way to collect on bad debt.33 In many communities, transfer stamps will not issue unless and until someone pays all outstanding fines and utility bills. Transfer stamps, and with them transfer taxes, ensure that the scofflaw’s bills not only come due but are paid.

Of course, municipalities are free to condition the sale of property—by issuing stamps or certificates of occupancy—on the payment of outstanding debts. And some municipalities do just that. But this does not require a tax. Elgin, for example, requires a transfer stamp, but does not charge any transfer tax.

Just how convincing any of these reasons are is unclear. Before making any sweeping conclusions, further study is needed. What is clear is that the use of transfer taxes—particularly by less-affluent municipalities—raises questions about fairness, equity, and necessity that should be considered by policy makers.

Conclusion

The most valued asset of most Illinois residents is their home. In a State with perpetually rising property taxes, policy-makers should train a skeptical eye on additional real-estate related taxes, particularly when they harm the State’s most vulnerable residents. Given that Illinois comprises over 100 counties and over 1,000 municipalities—the overwhelming majority of which do not impose transfer taxes—we should closely scrutinize how, when, and for what purpose(s) municipalities impose them.

 

Appendix

I gathered data for this project in four steps. In the first step, I identified Illinois municipalities that imposed transfer taxes. I started by examining the lists of transfer taxes maintained by title companies,34 which are used widely in Illinois real estate practice. I chose to begin with the Chicago Title Insurance Company’s Transfer Tax List (“Transfer Tax List”), which is current as of January 1, 2019.35 I then checked the requirements for each municipality by visiting each municipality’s website, and excluded those that required a stamp but did not impose any transfer tax, such as Elgin. I included, however, communities that charged a nominal amount but did not officially impose a transfer tax. An example is Lincolnwood, which requires homeowners to pay $30, but does not characterize it as a “tax.” I also included as “taxing” municipalities those that imposed inspection fees but did not otherwise require a stamp. Matteson, for example, requires an inspection and charges a fee to conduct one, but does not require a stamp. It does, however, require every resident to have a valid certificate of occupancy, which is issued after a successful pre-sale inspection.36 I determined whether a municipality charged an inspection fee by examining the Transfer Tax List and cross-checking the municipalities’ websites. I then determined the relevant fee using the fee schedule posted on the municipality website. I used only the fee that applied to single-family homes, townhouses, or condos. I did not perform a manual check of any municipalities not listed on the Transfer Tax List.

The second step involved collecting data on the household income of each municipality identified in the Transfer Tax List. To accomplish this, I visited the U.S. Government Census website, where I downloaded the 2013-2017 American Community Survey 5-Year Estimates database.37 I used this database to determine the mean and median household income of each municipality. In some cases, the municipalities did not have mean incomes, and therefore could not be included in the calculation. These included only Burnham, McCook, Mettawa, and Stone Park. These omissions, however, did not influence the overall analysis, which focused mostly on median household income.

In step three I obtained data on median and mean home sale prices in the relevant municipalities and cities. I collected all data concerning either median sales price or mean estimated value from Zillow.com on July 7, 2019. I searched and downloaded data for each municipality. I then averaged the median home sale prices over an approximately 12-month period. The result constituted the “median” home sale price in my dataset. Where median home sale prices were not available, I used Zillow’s estimated median value. The exception to this was Burnham, for which I relied on Trulia’s median list price as of July 8, 2019.38 On February 21, 2020, I obtained median home sale price data for Bolingbrook, Dolton, Elmhurst, Hillside, and Lincolnwood using Zillow.com. Again, I downloaded the median sale price history over the preceding 12 months. Using this 2019 data, I averaged the median home sale price for each municipality. The resulting value was the “median” home sale price for that municipality.

Where Zillow had no relevant data described above, I used Redfin.com to search all residential home sales within the past 12 months. I then downloaded the .CSV file from Redfin.com and averaged the median home sale price over the prior 12-month period. In calculating the median home sale price, I excluded sales of vacant land and multifamily properties.

The final step involved analyzing the data collected in steps one, two, and three. This included performing routine calculations, such as calculating transfer stamps as a percentage of mean and median household income.

1. Under certain conditions, the Internal Revenue Code exempts from the taxpayer’s gross income capital gains realized on the sale of the taxpayer’s principal residence. 26 U.S.C. § 121(a)-(b) (2018).

2. The Appendix explains how I collected, coded, and sorted data for this project. See supra pp. 39–40.

3. 55 Ill. Comp. Stat. 5/5-1031 (2019).

4. E.g., Cicero Code of Ordinances, § 90-223 (2019).

5. 35 Ill. Comp. Stat. 200/31-15 (2019) (stating requirements of obtaining paper or electronic stamps for the State transfer tax); 35 Ill. Comp. Stat. 200/3120 (stating requirement that a deed may not be properly recorded without proper affixation of a transfer stamp).

6. The State and applicable taxing counties and municipalities do not require tax be paid on “exempt” transfers, such as for transfers by, from, or between, religious educational, or nonprofit organizations. 35 Ill. Comp. Stat. 200/31-45(a)-(m) (2019).

7. 35 Ill. Comp. Stat. 200/ 200/31-10 (2019).

8. The law empowers the “county board” to “impose a tax upon the privilege of transfer title to real estate . . . .” 55 Ill. Comp. Stat. 5/5-1031(b) (2019); 86 Ill. Admin. Code tit. 120, §10(d) (2019) (setting forth procedures for buying state and county stamps for counties who elect to charge transfer tax).

9. 55 Ill. Comp. Stat. 200/ 5/5-1031 (2019).

10. There are over 1000 municipalities in Illinois. Illinois Counties and Incorporated Municipalities, Secretary of State 2012, https://www.cyberdriveillinois.com/publications/pdf_publications/ipub11.pdf (last accessed March 6, 2020).

11. One municipality, West Chicago, charges a transfer stamp based on the property’s square footage ($0.11 per square foot).

12. There are 20 municipalities where the buyer is responsible for all or part of the transfer tax. The Buyer is responsible for all of the transfer tax in 16 of those municipalities. Compare Cicero Code of Ordinances, § 90-226 (2019) with Wilmette Code of Ordinances § 8-846 (2019).

13. See Appendix, supra pp. 39–40.

14. Examples of municipalities that charge $50 per inspection are Blue Island, Berwyn, and Hillside.

15. North Riverside charges an inspection fee of $365 and a required fee of $45 for a “Certificate of Occupancy,” plus $0 for each reinspection. Certificate of Occupancy & Compliance, Village of North Riverside, http://www.northriverside-il.org/occupancy-compliance (last accessed Feb. 2, 2020).

16. One recent example of this in my own practice came from Matteson, where “dust” on the vents required cleaning and reinspection.

17. Matteson Code of Ordinances §150.016 (now § 105.5). The same is true if you live in North Riverside. See supra note 15.

18. See supra Table 2.

19. Selected economic characteristics, 2013-2017 American Community Survey 5-Year Estimates, U.S. Census. Bureau, Am. Factfinder, https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk (last visited Feb. 3, 2020).

20. The following municipalities require inspections: Addison, Berwyn, Blue Island, Broadview, Brookfield, Calumet City, Calumet Park, Chicago Heights, Cicero, Country Club Hills, Elmhurst, Elmwood Park, Evergreen Park, Forest Park, Franklin Park, Harvey, Hillside, Island Lake, Lyons, Markham, Matteson, Maywood, Melrose Park, Norridge, North Riverside, Posen, River Grove, Riverside, Robbins, Stone Park, University Park, Villa Park, Wauconda, and Westchester.

21. These municipalities are: Brookfield, Elmhurst, Evergreen Park, Island Lake, Matteson, Riverside, Villa Park, Wauconda, Westchester.

22. The municipalities are Brookfield, Elmhurst, Matteson, Riverside, Wauconda, Westchester. There is no data, however, on the mean household income of residents in Island Lake. Mean household income data were not available for East Dundee, Island Lake, Stone Park, Mc Cook, and Mettawa.

23. It does, however, require a zoning certificate ($120) and a water certification for all property transfers. The cost of each of these certifications is actually higher, however, because most homeowners must use a service to obtain them (zoning $50, water $75).

24. The actual tax paid by the seller in any given transaction is actually less than this amount since the buyer picks up the majority of the tab for stamps. But given that the cost is paid by the seller when she purchases the house, I have lumped the cost of the stamps into one “percentage” even if it does not actually reflect the “true” cost to the seller at the time of sale. I made the same calculations for municipalities where the buyer and seller share the costs of the stamps. The relevant municipalities are: Calumet City (split equally), Harvey (split equally), Lake Forest (buyer), Lincolnshire (buyer), Mettawa (buyer), Mt. Prospect (buyer), Niles (buyer), Norridge (buyer), North Chicago (buyer), Romeoville (buyer), Sycamore (buyer) and Wheaton (buyer).

25. Given that 50% of residents have incomes below the median, this number is higher for a large percentage of the municipality’s residents.

26. One, Joliet, had a median household income of $61,834, which is $605 above the median income of $61,229 for all Illinois residents.

27. 55 Ill. Comp. Stat. 5/5-1031 (2019).

28. The previous statute stated that “[t]he proceeds from such sale by the Department shall be deposited in the General Revenue Fund of the State Treasury.” 5 Ill. Comp. Stat. 305/3 (2019), in part; formerly Ch. 120, par. 1003.

29. See, e.g., Cook County Code of Ordinances § 74-104 (amended Sept. 25, 2019); Cook County Code of Ordinances §34.17(e) (amended Sept. 25, 2019). Counties are authorized to collect transfer tax by statute. 55 Ill. Comp. Stat. 5/5-1031(a) (2019).

30. See, e.g., Cook County Code of Ordinances § 74-104 (amended Sept. 25, 2019); Cook County Code of Ordinances §34.17(e) (amended Sept. 25, 2019). Counties are authorized to collect transfer tax by statute. 55 Ill. Comp. Stat. 5/5-1031(a) (2019).

31. See, e.g., Mark Huffman, Transfer Tax Idea a Hard Sell to Local Realtors, Jackson Hole News & Guide, Nov. 29, 2017, https://www.jhnewsandguide.com/news/real_estate/transfer-tax-idea-a-hard-sell-to-local-realtors/article_9c940736-330d-5974-89bf-93eced61c22d.html.

32. See supra Table 5.

34. Various title insurance companies publish these lists. Attorney Title Guaranty Fund, for example, maintains one with the same date as the Transfer Tax List. Real Estate Transfer Tax Ordinances, Attorneys’ Title Guaranty Fund, https://www.atgf.com/tax-ordinance/all (last visited Feb. 21, 2020). So, too, do some realtor organizations. See Real Estate Transfer Taxes: Listing of All Municipal Real Estate Transfer Taxes in Illinois, Ill. Realtors, https://www.illinoisrealtors.org/wp-content/uploads/2018/01/TransferTax.pdf (last accessed Feb. 21, 2020).

35. Chicago Title Insurance Company, https://www.cmetro.ctic.com/Uploads/0/FCKUpload/
files/Transfer_Tax_List.pdf (last visited Feb. 21, 2020).

36. See Matteson, Illinois, Code of Ordinances §150.015.

37. Selected economic characteristics, 2013-2017 American Community Survey 5-Year Estimates, U.S. Census Bureau, Am. Factfinder, https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.
xhtml?src=bkmk (last visited Feb. 3, 2020).

38. For Lyons and Matteson, the median home value was irrelevant to calculating the stamp as a percentage of median income. This is because these municipalities do not impose transfer tax, but rather non-tax fees, such as those for inspections. In any case, I obtained “median” home sale prices using Zillow’s Home Value Index as of February 28, 2020, which I treated as the “median” home sale price in each municipality.

The full text of this Article is available to download as a PDF.