When property ownership transfers from one party to another, a state transfer tax is assessed on the property. The transfer tax consists of both local and state taxes that are used to pay the state's administrative costs for registering the real estate title at the land records office. The transfer tax is only tax deductible on a rental or a real estate investment.
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The Internal Revenue Service allows a home seller to pay the property transfer tax at closing, but he cannot claim the payment on his federal tax return. The transfer tax is not an itemized deduction on Schedule A. The seller is allowed to deduct the transfer tax from his realized profit on the sale of the home.
According to IRS guidelines, a homebuyer can pay the state transfer tax at closing. The buyer is not allowed to deduct the property transfer tax on Schedule A of her federal tax return. The transfer tax does not increase the selling price of the home and is considered part of the property's cost basis.
If a buyer purchases a real estate property to use as a rental or an investment, the IRS allows him to deduct the state transfer tax as a work-related expense. The IRS only permits a buyer to deduct the transfer tax for the months the home was used as an investment. The buyer is not allowed to claim the state transfer tax as an itemized deduction.
The IRS allows an investment property owner to claim the state transfer tax on Schedule C of her annual tax return. The property transfer tax is considered a business expense and must be claimed along with other business expenses relevant to the upkeep and maintenance of the rental property.