Fee or Tax?

Question:
A state statute in Oregon prohibits local jurisdictions from passing a real estate transfer tax, yet HOAs are passing real estate transfer “fees” that have grown to be substantial, often one percent of the sales price and certainly more than required to cover any administration costs that might be involved in a title change. When does a real estate transfer “fee” become a real estate transfer “tax”?

—Tigard, Oregon

Answer:
Community associations in Oregon are not considered governmental entities. Thus, any Oregon state statute prohibiting local jurisdictions from passing transfer fees or taxes would not apply to community associations.

Some association governing documents authorize the association to charge a transfer fee (sometimes called a “capital contribution fee”) when a new owner purchases property in the community. Often, these transfer fees pay for administrative costs incurred by the association, such as copying governing documents, providing keys to recreational facilities or adding the owner’s information to the association’s records.

A number of governing documents charge a fixed transfer fee, while others charge a percentage of the closing price of the property. In any case, transfer fees can provide a valuable source of revenue for associations to offset administrative costs. In recent years, many associations have relied on transfer fees to remain financially solvent, especially when their governing documents place a cap on assessment increases.

However, market slowdowns can quickly reduce income from transfer fees. It can be risky to count on that income when preparing annual budgets.

Transfer fees have attracted a lot of attention lately, especially from Realtors who argue that transfer fees hurt associations by scaring potential buyers away. Transfer fees that beyond the cost of reasonable administrative costs may be viewed as disingenuous.

There are some states that have passed, or are considering, prohibitions on transfer fees in community associations. However, in jurisdictions such as Oregon where there is no legislative prohibition on transfer fees, community associations are legally authorized to collect transfer fees as long as that authority is granted in the governing documents.