Seller Pays Tax

• According to the Internal Revenue Service, or IRS, a seller can pay the transfer tax at closing, but she cannot deduct the tax on her federal tax Form 1040. She can include the transfer tax as a related expense on the sale of the property; thus, reducing her total realized profit. The deduction is not itemized as a tax deduction on Schedule A of her federal tax return.
  
  

Buyer Pays Tax

• The IRS allows a buyer to pay the transfer tax at closing and include the fee in the cost basis of the property. The cost basis is the actual sales price of the property. The buyer cannot itemize the transfer tax as a deductible expense on Schedule A. The transfer tax does not increase the selling price of the property and is viewed as a nondeductible closing cost.
  
  

Rental Property

• The transfer tax on a rental property or a real estate investment is tax deductible. The IRS allows the buyer to deduct the transfer tax as a business-related work expense. If the property is used as the owner's second residence part of the year, she can only deduct the transfer tax for the portion of the year that the property was used as a rental.
  
  

Schedule C

• If the property is used as a real estate investment, the owner cannot itemize the transfer tax on Schedule A. Since the property is used for business purposes, the owner can claim the deduction on Schedule C of his federal tax return. The transfer tax is itemized with other work expenses related to the use and upkeep of the rental property.