When real estate changes hands, a special tax comes into play. Some people call it the real estate conveyance tax. Others call it the real estate transfer tax.

The tax entered the spotlight recently when the General Assembly began taking a look at increasing it.

So now’s a good time to keep in mind a key point. No matter what the General Assembly decides to do about this tax, now or in the future, you can’t deduct it.

Yes, it’s a tax, not a fee. And, as you know, taxes are generally deductible; fees are not.

Nevertheless, the rule is that the real estate conveyance tax isn’t a deductible item, said Mary F. Bernard, president of the Rhode Island Society of Certified Public Accountants.

“It’s not going to be currently deductible, like a sales tax would be, or a [state] income tax would be,” she said.

Thus, if you itemize deductions on your tax return (instead of claiming a lump sum standard deduction amount), you can’t deduct the real estate transfer tax, as you would for state income taxes and Temporary Disability Insurance (TDI) taxes.

So if you’ve been involved in the sale of real estate this year and wind up paying the real estate transfer tax as a result (the seller usually pays the tax), you can’t deduct it when you do your federal and Rhode Island income-tax returns early next year.

Instead, you must add it to the basis of your property. Thus, purely from the standpoint of your personal income-tax picture, paying the transfer tax has little benefit.

Sure, it adds to your cost basis in the property. That means it can lower the size of your profit, reducing any capital gains tax you may have to pay.

But if you’re selling your principal residence, you probably won’t have to pay capital gains tax anyway, said Bernard, tax principal at Kahn Litwin Renza & Co. Ltd., a CPA firm in Providence.

That’s because of a special rule: If you’re single, up to $250,000 of the profit escapes federal and Rhode Island income tax; if you’re married, up to $500,000 of the profit escapes federal and Rhode Island income tax. (This assumes that you’ve owned and used the property as your principal residence for at least two out of the five years leading up to the date of the sale.)

So, as a practical matter, the real estate transfer tax only helps if your profit exceeds the dollar figures mentioned above, or if you’re selling real estate other than your principal residence — such as residential rental property or commercial real estate, Bernard said.

Rhode Island isn’t the only state with a real estate transfer tax. Nationwide, 35 states have such a tax in place, according to a report issued last year by the Federation of Tax Administrators, a professional group for state tax administrators.

Real estate transfer taxes are imposed on the sale or transfer of real estate located in the state. The tax is usually based on, or measured by, the consideration paid for the real estate, or the real estate’s fair market value, the report said.

The tax is commonly collected by the local official responsible for recording deeds to real estate, and it must be paid prior to the deed to the property being recorded, the report said. (In some cases, the tax is paid by the affixing of stamps to the deed.)

In about two-thirds of the states that impose the tax, the tax rate is below 0.5 percent of the value of the transfer, the report said. In seven states and the District of Columbia, the state tax rate is 1.0 percent or greater.

In Rhode Island, the tax generally equals $2 for every $500 of the sales price of the property. Thus, a $250,000 sale generally results in $1,000 in real estate conveyance tax — for a tax rate of 0.4 percent.

(Under one version of legislation the General Assembly recently considered, the tax would jump to $3 for every $500 of the sales price of the property. So on a $400,000 sale, for example, you’d pay a tax of $2,400, instead of the current $1,600, a 50-percent increase.)

For the year ended June 30, 2006, the Rhode Island real estate conveyance tax generated more than $30 million in revenue (part went to the state, part to cities and towns).

TODAY’S TIP: Last week, I wrote about a new loan program from the U.S. Small Business Administration (SBA). In essence, it’s intended to quickly provide loans to veterans, members of the military community and their spouses who want to start or expand a business. The loans are issued by many banks and credit unions and backed by the SBA.

Keep in mind, too, that the IRS publishes a free CD that includes important and helpful information for anyone who owns or plans to start a small business, including freelance and moonlighting businesses.

It’s “The Small Business Resource Guide CD.” It includes information on how to prepare a business plan, how to find financing for your business, and what taxes you’ll face.

To order your free copy, call the IRS toll-free at 1-800-829-3676 or see this IRS Web site:

www.irs.gov/smallbiz

For more information about the new SBA loan program, call the SBA toll-free at 1-800-827-5722. You may also call the Providence SBA office at (401) 528-4561, or use this SBA Web site:

www.sba.gov/patriotexpress

Neil Downing is a Journal staff writer and author of The New IRAs and How to Make Them Work for You. Questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail:

moneyline@projo.com

Sorry, no personal replies; as many questions and issues as possible will appear here.