Unfortunately, transfer taxes are not tax deductible. Transfer taxes are fees imposed to legally transfer a real estate title, and they vary by state. Often, the seller will pay the tax; however, the tax is not deductible for either the buyer or the seller. (One exception: while transfer taxes cannot be deducted on the sale of personal property, they can be deducted as a work expense if the property is used as a rental home or a real-estate investment).
Transfer taxes can save you money on tax returns down the line, however. Transfer taxes become part of the cost basis of the property, which is used to calculate the final gain on sale if the property is sold. Raising the cost basis of the home decreases the total gain on sale, which decreases the total taxes you pay on the gain.
For example: let’s say you bought a house for $250k, and sold the same property for $520k. Your gain on sale is $270k. If you are filing alone, you must pay taxes on any gains over $250k ($500k for married couples filing jointly). This means you would pay taxes on the remaining $20,000. However, if you spent $8,000 in transfer taxes, these are added to the house’s original property value. This brings your taxable gain down to $12,000.
Other costs that can be added to your cost basis include fees such as title insurance, and improvements that increase the property's value, such as building additions, paving driveways, or installing new plumbing.