What Is an Excise Tax? How Excise Tax Works in Real Estate

An excise tax is a narrow, legislated tax on specific goods or services, especially motor fuel, tobacco products, air travel, alcohol, certain telephone services, and indoor tanning services. An excise tax is primarily an indirect tax, which means that retailers or producers pay it upfront and pass on the cost to consumers by increasing the retail price of their goods. However, consumers are responsible for paying some direct excise taxes, such as [property tax](https://www.masterclass.com/articles/what-is-property-tax) and taxes resulting from making early withdrawals from their retirement accounts. General excise taxes have many nicknames based on the specific item they’re levied on, including fuel tax, tobacco tax, airline ticket tax, tanning salon tax, and sin tax. Federal, state, or local governments can establish an excise tax, which can be either a unit tax (paid per gallon or another amount) or an ad valorem tax (by percentage). Along with income taxes, excise taxes make up most of the revenue stream for the federal government. Taxpayers are usually responsible for paying federal excise taxes directly to the Internal Revenue Service (IRS). In real estate, local and state governments may levy a real estate excise tax (or REET) on the sale of real property, which refers to land and immovable assets attached to the land, like homes or buildings. While sellers traditionally pay the REET at the time of sale, the buyer is generally liable for it, which is why some lenders offer to fold it into [closing costs](https://www.masterclass.com/articles/what-are-closing-costs-explained). Some states require the buyer to pay the REET; if they fail to pay, lenders can place a lien on the property, which is a legal claim that helps them secure or recover their debt. The REET is calculated as a percentage of the home’s selling price, subject to the local or state government’s real estate excise tax rates (state REET rates can range from around .01 percent to up to around 1.28 percent). In some cases, sellers may apply for an exemption code from REET, for instance, if they give the property away as a gift. Here is an overview of how excise taxes work in real estate: 1. __A sale closes__. For a real estate excise tax to come into play, a property sale must officially close in a state or local area that has a REET in place. Local governments may levy REETs on different types of property sales, including personal property, mobile homes, agricultural land, and timberland (privately owned land). In certain areas, REETs may also apply in cases of controlling interest transfer, in which a property owner transfers 50 percent or more of the ownership of a property. 2. __The seller pays the REET__. After the sale officially closes, the seller is responsible for paying the real estate excise tax to the [escrow agent](https://www.masterclass.com/articles/escrow-agent-explained) or real estate attorney. The local rate structure and the property’s final sale price will largely determine the tax amount. Some lenders offer the option of bundling the REET payment with other closing costs. 3. __A licensed third party sends the payment to the government__. Once the escrow agent or attorney receives the local or state real estate excise tax payment from the seller, they must first fill out the correct documentation, which may include a real estate excise tax affidavit, an excise tax form, or a conveyance document. Once the documents are in order, they will send the payment and tax information to the proper government entity, usually a county treasurer or assessor, the state treasurer’s office, or the state’s department of revenue. All you need is a [MasterClass Annual Membership](https://www.masterclass.com) and our exclusive video lessons from prolific entrepreneur Robert Reffkin, the founder and CEO of the real estate technology company Compass. With Robert’s help, you’ll learn all about the intricacies of buying a home, from securing a mortgage to hiring an agent to tips for putting your own place on the market. A real estate excise tax is a type of sales tax that homeowners in certain areas of the United States may be responsible for paying when they sell their homes.