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:
- The property must be your first owner-occupied home in Washington, D.C.
- Property Sale Price must be less than $753,000
- Meet the household income limits set by the program guidelines
Unfortunately, many people miss out on their savings because the team representing them (Realtor and Lender) fails 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, and gas, the local government taxes you on the cost of your goods. Transfer Tax is a sales tax on the sale of a home. In DC, the transfer tax is 1.1% of the sale price up to $400k and 1.45% for home prices over. The seller pays an identical amount, meaning the district's total revenue is 2.2% – 2.9% of the sale price for every house sold.
In May 2024, the median sale price was $695,000, giving the District $20,155 in revenue per home sold. That same month, 670 houses were sold, bringing in just over $13.5 Million in tax revenue. You can now see why many economists say, “Housing is the economy's foundation!”
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 savings of .35% for homes priced up to $400k and .725% for homes priced between $400,000-$753,000. Using the median price of $695k, the average homebuyer would save $5,039!
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 $753,000.
Household Income Limits – The program is designed to help those with less than the median household income. It is important to realize that the income limit is not what you make today; it’s not even what you “earned” last year! Read below for more details on analyzing income.
Persons in Household / Income Limit
One Person Household – $194,940
Two-Person Household – $222,840
Three-Person Household – $250,740
Four-Person Household – $278,460
Five-Person Household – $300,780
Six-Person Household – $323,100
Loophole Alert
Occasionally, I speak with clients who appear unqualified to take advantage of this program. For instance, the income limit for a single person is $194,940. If one currently makes $200k/yr (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.”
The DC Tax and Revenue Office will review your most recently filed tax return to qualify for the Tax Reduction. Look at line 11 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 from your pre-tax retirement contributions. For example, if you made $200,000 in 2023 but contributed $18,000 in a traditional 401k, your adjusted gross income would be $182,000…which means you qualify even though you made more money! Take that a step further. You could have just received a promotion to make $500k per year in 2024, but if your adjusted gross came in less than the limit in 2023, you would still qualify for the savings!
What is the Approval Process?
Of all the First-Time DC Homebuyer Programs, this one is 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 Home Buyer program in D.C., 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 industry professionals! You can give us a call at 202.899.2600 or book a consultation using our digital calendar. Our team will provide you with a full review of all down payment assistance programs in Washington, D.C.
We are The Downs Group at Vellum Mortgage, a top mortgage lender in the D.C. / Baltimore Metro Area. Our passion is to educate all types of homebuyers to unlock their wealth potential in life!