Budget Watch Nevada

Real Property Transfer Tax Adds Big Bucks to the Cost of Your Next Home

Nevada Revised Statutes’ chapter 375 outlines one of the most insidious, perverse taxes of them all, the Real Property Transfer Tax (R.P.T.T.). The following example will walk us through the imposition of this multi-layered tax and how it affects the purchase or sale of your next home.

This new homes development process is very common, and affects nearly every new home purchased in Las Vegas. Since over the last 3 years a large percentage of new homes have been built in master-planned communities like Mountain’s Edge, Providence, Summerlin, and Aliante, you’ll quickly see one of the reasons the cost of housing has risen so fast and why cities and counties around the state are flush with windfall revenues.

This is a common path for development of new homes, from acquiring the raw land all the way through to purchase of a new house by Mr. and Mrs. Workerbee.
1. A developer of master-planned communities purchases raw land from the federal government (BLM) or from a long-time private property owner. (In the case of the BLM auction, not only does the developer pay a tax on the purchase, but there is a hidden tax in the form of regulations which demand that a percentage of that privately-purchased land be turned over to the city or county for so-called “public uses.” But we’re not including that cost in this exercise.)
2. The master developer sells large parcels to builders to build homes and apartments. Builders now subdivide the parcels into plats, or buildable lots, often enduring long approvals from the municipalities (another hidden tax).
3. Builder then builds the house (paying thousands in fees to the county, along with “water connection” fees of between $5,000 and $10,000 per unit – again, not a part of this analysis), before finally transferring ownership of the house and lot to the happy homeowners, Mr. and Mrs. Workerbee.

In the above illustration, R.P.T.T. is paid 3 times on the same property! Each time, government coffers benefit and the productive sector is penalized.

The current R.P.T.T. tax rate in Clark and Washoe counties is $2.55 per $500 in value, equal to $5.10 per $1,000 in value, or .51% of the transfer value.

Land costs vary wildly year to year, and area to area, but I will use some realistic, conservative, average values in order to calculate the tax on property transactions from original to final purchase.

1. Purchase of BLM land from the Feds for $300,000 per acre. Let’s use an example of 2,000 acres, of which the developer must deed over to the county/city for public use, easements, and rights of way. R.P.T.T. tax: $3,060,000.
2. Developer sells 1,600 acres to 10 builders, 160 acres each, for $400,000 per acre, which includes some improvements and infrastructure. R.P.T.T.: $3,264,000.

A builder will typically build 5-8 units per acre for single family detached housing, and 16-20 per acre for townhomes and condos. For the sake of this argument, let’s look at a pretty common house and lot in a subdivision with a density of 8 houses per acre (this is very conservative; many communities only get 5-6 units per acre, net). To this point, an individual property from raw land to buildable lot has cost $494 in R.P.T.T.

So far, the only people making any money on this development are the government and some contractors and bankers. The builder hasn’t made a dime. And, of course, local governments are raking in property taxes that were nil before the BLM auction purchase.

3. Finally, Mr. and Mrs. Workerbee close escrow on their new house, which costs $300,000 (again, a fairly conservative estimate). R.P.T.T.: $1,530.
4. Keep in mind that in 2004-05 between 10-20% of new homes were purchased by investors and then re-sold within 2 years, adding even one more level of R.P.T.T. burden, but we’re not including that in this analysis.

Bottom line: In this example, the total Real Property Transfer Tax alone in the cost of Mr. and Mrs. Workerbee’s new home is $2,024. And they now start paying property taxes of about $2,000 per year. And in the case of the master plans mentioned above, they must also pay a Special Improvement District (S.I.D. or L.I.D.) tax of about $800 per year for 15 years.

If we now multiply this by the 10 builders in our example, time 1,280 houses each, the total amount of money extracted by government from buyers of new homes in R.P.T.T. alone is $25,907,200. Since roughly 25,000 new homes are sold each year, the figure could be doubled to estimate the cost to consumers just to buy into the American dream in the Las Vegas metro area.

With huge run-ups in property values between 2003 and 2006, local governments, especially Clark County, enjoyed unprecedented and obscene windfall profits from property taxes and Real Property Transfer Taxes. Cries for more money by the state and municipalities in Southern Nevada are shameful and disgusting. Governments should have been lowering tax rates or rebating money to taxpayers during that boom.

By Mark Warden
The author is president of Budget Watch Nevada and has worked in the new homes development industry in Las Vegas for 10 years.