Many people moving to the DC Metropolitan Area consider both DC and MD during their home search. While both locations provide excellent lifestyles, with bountiful access to recreation, entertainment, and relaxation, there can be a huge difference in an area less fun than those: taxes.
The property tax code in DC and MD has some notable differences that all buyers should know before purchasing real estate.
Residential Tax Rate in DC
Non-vacant residential properties in DC are taxed at a rate of $.85 per $100 of assessed value. Commercial, vacant, and blighted properties are taxed at different rates.
Tax Assessments in DC:
An assessment is the estimated market value of your home. This value is determined by a city assessor who ascertains the most reasonable price that you can sell your property for given normal terms and conditions of sale. DC reassesses real property on an annual cycle. In both DC and MD, you can file an appeal If you believe that your assessment is incorrect.
Additionally, since the housing market in DC has seen tremendous growth over the last decade, the district tries to protect qualifying individuals via an “Assessment Cap”. This cap prevents eligible homeowners from assessed value increases of more than 10% annually. However, to protect resale value, this credit does not reduce the assessed value of the property on the tax roll but instead provides homeowners with an automatic credit against their real property tax bill.
You also pay taxes in both states when you buy and sell a home. These taxes are separated into two types: Transfer Taxes and Recordation Taxes.
Transfer Taxes in DC:
1.1% of the sales price or the fair market value on property transfers less than $400,000 and 1.45% of the sales price or fair market value on the entire amount if the transfer is greater than $400,000.
Recordation Taxes in DC:
1.1% of the sales price or the fair market value on property transfers less than $400,000 and 1.45% of the sales price or fair market value on the entire amount if the transfer is greater than $400,000.
*There is a First-Time Homebuyer Credit that can reduce the recordation tax that I’ll cover in the tax breaks and credits section.
These taxes are typically split 50/50 by the buyer and the seller at settlement.
Are there any tax breaks or benefits? Yes, both DC and MD have specific real estate-related tax breaks and credits that they issue to buyers.
First-Time Homebuyer Individual Income Tax Credit
This federal tax credit of $5,000 is available for first-time homebuyers in DC if they are single or are married but filing jointly. It is $2,500 if they are married but are filing separately. Some income restrictions and other qualifications may apply.
First-Time Homebuyer Recordation Tax Credit:
This program reduces the amount of recordation tax due at closing. If qualified, you will pay .725% of the sales price in recordation tax, instead of the normal rate of 1.1%-1.45%.
To qualify, the purchase price for your new home must be $684,500 or less, and your household adjusted gross income (for a single person) can be no more than $179,460.00, and for two (2) people no more than $205,020*.
*Please note: the qualifying household income limit is dependent on the number of people who will live in and/or co-own your new home.
Tax Abatement:
The DC Tax Abatement program waives your property taxes for up to the first five (5) years of your homeownership and waives the recordation and transfer tax that would be due at closing. To qualify, the purchase price for your new home must be $548,000.00 or less, and your current household gross income (for a single person) can be no more than $75,600, and for two (2) people no more than $86,400.00.*
*Please note: the qualifying household income limit will be higher for multi-person households and properties located in an Economic Development Zone. (Full income qualification table can be found on pages 3 & 4 of the
application)
If you wish to apply for tax abatement, please provide the following information:
Homestead Deduction
This benefit reduces a qualifying homeowner's property assessed value by $78,700 before computing the yearly tax liability. This benefit only applies to principal residences occupied by the owner.
Senior Citizen Tax Relief:
This tax credit reduces a homeowner's property tax rate by 50% provided at least one of the homeowners is 65 or older. To qualify, your adjusted gross annual income must be less than $125,000.
In addition to these common tax credits, there are many more that enable all different kinds of residents, including disabled and lower income, to achieve more comfortable home ownership. Please refer to this link to view all credits
Residential Tax Rate in MD
In Maryland, unlike in DC, some counties also levy a real estate tax. Therefore, property taxes vary widely based on the city and county. For this article, we’ll use Montgomery County as an example. In this county, the effective tax rate (a combination of state, county, and municipal taxes) for residential property is roughly $.99. Like DC, they express the tax rate as a dollar amount per $100 in assessment.
Tax Assessments in MD:
An assessment is the estimated market value of your home. This value is determined by a city assessor who ascertains the most reasonable price that you can sell your property for given normal terms and conditions of sale. DC reassesses real property on an annual cycle. In both DC and MD, you can file an appeal If you believe that your assessment is incorrect.
Additionally, since the housing market in DC has seen tremendous growth over the last decade, the district tries to protect qualifying individuals via an “Assessment Cap”. This cap prevents eligible homeowners from assessed value increases of more than 10% annually. However, to protect resale value, this credit does not reduce the assessed value of the property on the tax roll but instead provides homeowners with an automatic credit against their real property tax bill.
Properties are assessed in MD once every three years as opposed to every year in DC. Like in DC, assessments are based on the property’s fair market value, as determined by a licensed appraiser. Like in DC, homeowners can file an appeal in MD if they believe that their assessment was incorrect. Additionally, MD also has a 10% annual assessment cap limit on state and county property taxes. This cap is also in the form of a credit that is valued against their real property tax bill.
Transfer Taxes in MD:
In Maryland, there are both state and country transfer tax rates. Therefore, the transfer tax rate that buyers and sellers pay when the title is transferred will differ depending on what county you live in.
Continuing to use Montgomery County as an example, the transfer tax rate will be
1.50% of the sales price (.5% in state tax and 1% in county tax) of the fair market value on property transfers regardless of price.
Recordation Taxes in MD:
The Recordation tax rate is $8.90 per every $1,000 of the purchase price if it’s under $500,000 and $13.50 per every $1,000 of the purchase price if it’s over $500,000.
For example, if you buy a house for $1,000,000 your recordation tax rate would be 1.35%.
*There is a First-Time Homebuyer Credit that can reduce the recordation tax that I’ll cover in the tax breaks and credits section.
These taxes are typically split 50/50 by the buyer and the seller at settlement.
First-Time Homebuyer Transfer Tax Discount
This program reduces the amount of state transfer tax due at closing for homebuyers purchasing their first home in Maryland. This home must be their primary residence. If qualified, you will pay .25% of the sales price in state transfer tax, instead of the normal rate of 5%. Please note that this credit does not affect the county transfer tax amount.
While MD has fewer common credits than DC, there are still plenty available. For a more robust list of Maryland tax credits and programs please visit
here.
Please feel free to reach out to me if you have any further questions on property taxes or anything else real estate-related. I enjoy being able to share information that may help someone navigate their home purchase or sale with a better understanding of the real estate system. If you would like to schedule a commitment-free consultation and valuation you can reach me at
[email protected] or
(202) 615-7233.
