The closing cost bill passed last week will lower government taxes on first-time buyers but raise costs for sellers and move-up buyers.
The law exempts first-time buyers from paying the state's transfer tax of one-half percent. Traditionally, the transfer tax is split between buyer and seller, though this is always negotiable. The law, in effect, will require the tax to be split and exempt the buyer from his share.
On a $100,000 house, the state transfer tax is $500. The seller now pays $250 and the buyer pays $100 -- equivalent to a half-share minus a $150 credit that all buyers receive.
Under the new law, the seller will pay the same amount, $250, but the buyer will pay nothing, saving $100.
To pay for the tax cut for first-timers, the state will eliminate the $150 credit toward the state transfer tax it gave all homebuyers in 1987. That means that move-up buyers will pay $150 more in transfer taxes.
In addition to the state tax, many counties levy local transfer taxes and charge recordation fees. Under the closing cost measure, sellers must pay those local fees for a first-time buyer, unless they negotiate otherwise in a sales contract.
Sellers who fail to negotiate on local fees as part of a contract could get stuck paying hundreds more than they do now.
For instance, in Baltimore County, which levies the highest of the local transfer taxes, 1.6 percent, a seller of a $100,000 house to a first-time buyer could end up paying $1,050 more -- in addition to picking up another $250 in state transfer tax.
Some critics fear the added expense could cause sellers to shy away from first-time buyers or raise their asking price to offset costs. Or sellers might negotiate a sales contract in such a way that buyers won't get the intended benefits.
'Shifting the burden'
"You're shifting the burden from the buyer to the seller," said Del. James F. Ports Jr., a Baltimore County Republican and member of the Ways and Means Committee, which had offered a slightly different version of the final bill.
"The kicker is that if you're a homeowner and sell to a first-time buyer, you're going to have to pick up the county transfer taxes when you buy your next home.
"And if you make it negotiable, the first-time buyer is likely not going to benefit," Mr. Ports said. "What we may have done is shrunk the market for first-time homebuyers."
But Alan Rifkin, a lobbyist for Ryland Homes, said the new legislation actually creates a market for first-time buyers by having sellers pick up a portion of closing costs.
"It sends the right signal to the buying public, that Maryland recognizes closing costs are too high, and something is being done about it," Mr. Rifkin said.
He added that "encouraging potential purchasers to enter the market benefits everyone. The more new purchasers that enter the marketplace, the more activity gets generated."