New York City has some of the most expensive real estates in the world, with stunning high-rise apartments and sprawling townhouses attracting wealthy buyers from across the globe. To help fund much-needed affordable housing initiatives, the New York State government introduced the NYC Mansion Tax in 2019, which levies an additional tax on residential properties sold for $2 million or more. The Mansion Tax has already had a significant impact on the city’s real estate market, with some experts predicting that it could deter wealthy buyers and lead to a slowdown in luxury home sales. In this article, Eastcoastlawss.com will explore what the NYC Mansion Tax is, how it works, and what it means for buyers, sellers, and the city’s housing market as a whole. We’ll also take a closer look at the arguments for and against the tax, and whether it’s likely to achieve its intended goals of increasing affordable housing and reducing income inequality in the city.
Overview Of The NYC Mansion Tax
The NYC Mansion Tax is a surcharge on the purchase of residential properties in New York City that are sold for $2 million or more. The tax was introduced in 2019 as part of a package of reforms aimed at funding affordable housing initiatives across the city.
Under the Mansion Tax, buyers of residential properties in New York City are required to pay an additional tax on top of the standard transfer taxes and fees. The rate of the Mansion Tax varies depending on the sale price of the property, with higher-priced homes subject to higher tax rates.
The Mansion Tax is typically paid by the buyer of the property at the time of closing. However, in some cases, the seller may agree to pay the tax as part of the sales agreement.
The revenue generated by the Mansion Tax is used to fund affordable housing initiatives in New York City. This includes the construction of new affordable housing units, as well as the preservation of existing affordable housing stock.
While the Mansion Tax has been praised for its potential to generate much-needed funding for affordable housing, it has also been criticized by some as a potential deterrent to wealthy buyers. The tax has already had an impact on the city’s luxury real estate market, with some experts predicting that it could lead to a slowdown in sales of high-priced properties.
How Does The Mansion Tax In NYC Work?
In New York City, the mansion tax applies to anyone who purchases any property for $1 million or more. The tax rate is expressed as a straightforward percentage of the cost. For instance, you would have to pay $15,000 to purchase a condo for $1.5 million.
The price difference between purchasing an apartment for $999,999 and another for $1 million is substantial because the mansion tax NYC is levied on the whole value of the property. The consumer really pays $10,001 more for that one extra dollar. Real estate closings at slightly over $1 million are very uncommon. This is not the only transfer tax in NYC.
How Is The Mansion Tax Calculated In NYC?
In New York City, a mansion tax is a tax on real estate transactions involving residential properties that are sold for $1 million or more. The mansion tax is calculated as a percentage of the sale price and is payable by the buyer at the time of closing.
The current mansion tax rates in NYC are:
- 1% of the sale price for properties sold for $1 million to $1.99 million
- 1.25% of the sale price for properties sold for $2 million to $2.99 million
- 1.5% of the sale price for properties sold for $3 million to $4.99 million
- 2.25% of the sale price for properties sold for $5 million or more
For example, if a residential property in NYC is sold for $2.5 million, the mansion tax calculation would be as follows:
- 1% on the first $1 million = $10,000
- 1.25% on the next $1 million ($1 million to $2 million) = $12,500
- Total mansion tax = $22,500
It’s important to note that the mansion tax is in addition to other closing costs and fees associated with buying or selling a property in NYC.
Mansion Tax NYC Rates
- 1.00% for purchases $1,000,000 to $1,999,999
- 1.25% for purchases $2,000,000 to $2,999,999
- 1.50% for purchases $3,000,000 to $4,999,999
- 2.25% for purchases $5,000,000 to $9,999,999
- 3.25% for purchases $10,000,000 to $14,999,999
- 3.50% for purchases $15,000,000 to $19,999,999
- 3.75% for purchases $20,000,000 to $24,999,999
- 3.90% for purchases $25,000,000 or greater
It is crucial to factor in the mansion tax NYC buyers must pay (if applicable) in your calculations for the appropriate rate based on your purchase price when you are estimating how much you will need to buy an apartment or home in NYC or when your real estate attorney is calculating your closing costs in advance of your transaction. For instance, in addition to all other closing fees, if you are spending $2,500,000 on a condo or co-op, you will also need to pay an NYC mansion tax of 1.25%, or $31,250. (assuming you signed your contract after April 1, 2019, and close after July 1, 2019).
Exemptions and Exceptions
There are several exemptions and exceptions to the mansion tax in New York City. Some of the most common ones include:
- Residential properties sold for less than $1 million are not subject to the mansion tax.
- Residential properties that are purchased by the United States government, the State of New York, or any of their instrumentalities are exempt from the mansion tax.
- Residential properties that are purchased by certain nonprofit organizations or religious institutions may also be exempt from the mansion tax.
- If a buyer is a natural person who will use the property as their primary residence, and the sale price is between $1 million and $2 million, they may be eligible for a partial exemption. In this case, the mansion tax rate would be reduced from 1% to 0.25% on the portion of the sale price between $1 million and $1.99 million.
- If the residential property is located in certain designated areas of New York State, the mansion tax may be reduced or waived entirely. For example, properties in certain areas of the Adirondack and Catskill Parks may be eligible for a partial or full exemption.
- If the residential property is being transferred to a spouse, domestic partner, or child of the seller, the mansion tax may be waived entirely.
It’s important to note that the exemptions and exceptions to the mansion tax in New York City may change over time, and there may be additional eligibility requirements or restrictions that apply.
More NYC And State Mansion Transfer taxes
Transfer Tax NYC
The Real Property Transfer Tax (RPTT), often known as the New York City real estate transfer base tax, is paid by the seller in resales. The tax is 1% of the purchase price if the property is valued at $499,999 or less.
The tax rises to 1.425% for houses sold for $500,000 and more. Even higher rates apply to multi-unit properties: 1.425% for homes priced at $499,999 or less and a shocking 2.625% for those sold for more than $500,000.
State Transfer Taxes
The real estate transfer base tax levied by the state of New York is another. It is computed at a rate of $2 for every $500, or around 0.4% of the transaction price, and the seller is also responsible for paying it. For residential deals worth more than $3 million, the tax rises to 0.65%.
For instance, the seller of a $1.5 million NYC co-op or condo would have to pay $21,375 (1.425%) in NYC transfer taxes in addition to $6,000 in New York State transfer taxes.
Who Pays the Mansion Tax NYC?
If you buy residential real estate in New York City, you must pay the mansion tax NYC within 15 days of closing on the sale or transfer. You should include it in your projected closing costs. Although one percent might not seem like much, if you’re financing the purchase, it makes up a significant amount of the entire cash outlay. The mansion tax is owed on the acquisition of “any premises that is or may be utilized in whole or in part as a personal dwelling and shall include a one, two, or three-family house, an individual condominium unit, or a cooperative apartment unit,” as stated in the statute that established the tax.
How to Legally Avoid or Reduce the Mansion Tax
There are several ways to legally avoid or reduce the Mansion Tax in NYC. Here are a few options:
- Purchase a property for less than $1 million: The Mansion Tax only applies to residential properties valued at $1 million or more. If you purchase a property that is valued at less than $1 million, you won’t be subject to the Mansion Tax.
- Negotiate with the seller: In some cases, the seller may agree to cover the cost of the Mansion Tax as part of the negotiation process. This could be especially likely if the property has been on the market for a while and the seller is motivated to make a deal.
- Buy a co-op or condo: The Mansion Tax only applies to single-family homes and some townhouses. If you purchase a co-op or condo, you won’t be subject to the Mansion Tax.
- Transfer the property in installments: If you are purchasing a property that is valued at more than $1 million, you may be able to avoid the Mansion Tax by transferring the property in installments. This can be done by using an installment sale agreement, which allows the buyer to pay for the property over a period of time rather than in one lump sum. The Mansion Tax is only assessed on the portion of the sale price that is paid at closing, so this can help reduce the amount of the tax.
- Consult with a tax professional: There may be other legal ways to reduce or avoid the Mansion Tax that is specific to your situation. It’s a good idea to consult with a tax professional or real estate attorney to explore all of your options.
Dangers of Not Paying NYC Mansion Tax
Some people disobey the law and tell lies about the price they purchased their house in order to avoid paying the mansion tax. If tax officials discover this, the buyer and possibly the seller will be in serious trouble and face a large fine. Yet, a lot of people take the chance because this tax is so high. This is how it goes. The mansion tax is avoided when a buyer and seller agree to a stated closing price that is less than $1 million. But, the real final price is above $1 million. “Under the table” payments are made for the difference between the two. In exchange for agreeing to the strategy, the buyer typically gives the seller a small premium over the sales price. To avoid paying income or capital gains tax, some sellers take this action.
Both buyers and sellers shouldn’t succumb to this temptation. It’s not only against the law, but it’s also rather simple to get caught. Any property sold below market value will instantly raise red flags among the tax authorities who will scrutinize the deal. It’s just not worth spending time in jail for a little extra cash.
Impact of NYC Mansion Tax on the Real Estate Market
The NYC Mansion Tax can have a significant impact on the real estate market, particularly at the higher end of the market. Here are a few ways that the Mansion Tax can affect the real estate market:
- Slows down high-end sales: The Mansion Tax can make it more expensive for buyers to purchase high-end properties, which can slow down sales in the luxury market. This can be especially true during periods of economic uncertainty when buyers may be more hesitant to take on additional expenses.
- Motivates sellers to lower prices: If a seller is motivated to sell quickly, they may be willing to lower the price of their property to avoid the Mansion Tax. This can lead to downward pressure on prices in the high-end market.
- Impacts buyer behavior: Buyers may be more likely to look for properties that are priced just below the Mansion Tax threshold to avoid paying the tax. This can make it more challenging for sellers of properties that are just above the threshold to find buyers.
- May create opportunities for buyers: While the Mansion Tax can make it more expensive to purchase high-end properties, it can also create opportunities for buyers who are looking for deals. Sellers may be more willing to negotiate on price in order to attract buyers who are looking to avoid the tax.
Alternatives to the Mansion Tax
There are several alternatives to the Mansion Tax that have been proposed or implemented in other areas. Here are a few examples:
- Progressive property tax: A progressive property tax is a tax that is based on the value of a property. This type of tax would require higher taxes for more expensive properties but could be designed to avoid the negative impact on the real estate market that the Mansion Tax can create. This type of tax could also generate revenue for the city that could be used to fund public services or affordable housing.
- Transfer tax: A transfer tax is a tax that is paid when a property is sold. This type of tax could be designed to be progressive, meaning that the tax rate increases as the value of the property increases. Like a progressive property tax, a transfer tax could generate revenue for the city that could be used to fund public services or affordable housing.
- Vacant property tax: A vacant property tax is a tax that is assessed on properties that are vacant or unused. This type of tax could encourage property owners to use their properties or sell them to someone who will use them, which could help increase the supply of housing in the city.
- Land value tax: A land value tax is a tax that is assessed on the value of the land, rather than on the value of the property that sits on the land. This type of tax could be designed to encourage property owners to develop their land or sell it to someone who will develop it, which could help increase the supply of housing in the city.
Legal and Administrative Issues
There are several legal and administrative issues related to the Mansion Tax in NYC. Here are a few of the most important ones:
- Compliance: Like any tax, the Mansion Tax requires compliance from both buyers and sellers. This can be challenging if buyers or sellers are not aware of the tax or if they try to avoid paying it. To address compliance issues, the city may need to invest in education and enforcement efforts to ensure that all parties are aware of their obligations and are following the rules.
- Threshold: The current Mansion Tax threshold is $1 million, which means that it only applies to properties that are valued at $1 million or more. Some critics argue that this threshold is too low and that it can discourage buyers and sellers from participating in the high-end real estate market. On the other hand, increasing the threshold could result in less revenue for the city.
- Equity: The Mansion Tax is a flat tax, which means that it applies to all properties that meet the threshold regardless of their value. Some argue that a progressive tax, like a progressive property tax or a transfer tax, would be more equitable because it would require higher taxes for more expensive properties. However, implementing a progressive tax could be challenging and may require changes to the current tax system.
- Administrative costs: Collecting the Mansion Tax and enforcing compliance can be costly for the city. The city may need to invest in additional staff, resources, and technology to ensure that the tax is collected and enforced effectively.
When he was governor of New York in 1989, Governor Cuomo’s father proposed the mansion tax. Even if you probably couldn’t purchase a mansion in New York City for $1 million back then, you could still buy a lot more homes than you can now. The CPI Inflation Calculator estimates that the value of $1 million in 1989 has increased to just over $2 million now.
The fact that the mansion tax hasn’t been updated to account for inflation is obviously a concern. Yet, there have been initiatives to change the statute. Mayor Bill de Blasio sought to alter the law in 2015 by preserving the 1% tax but only applying it to real estate transactions involving properties worth more than $1.7 million. Albany’s legislators rejected the such suggestion.
In 2017, the mayor made another attempt, hiking the tax to 2.5% but only for homes selling for $2 million or more. Had this passed, it was anticipated to generate over $300 million in income. This cash would be used to fund senior homes. This suggestion was also rejected.
Comparison to Other Cities
Several other cities in the United States have implemented taxes on high-end real estate similar to the Mansion Tax in NYC. Here are a few examples:
- San Francisco: In 2018, San Francisco implemented a transfer tax on properties that sell for $25 million or more. The tax rate is 2.75%, which is similar to the highest rate of the Mansion Tax in NYC.
- Washington, D.C.: In 2019, Washington, D.C. implemented a progressive transfer tax on properties that sell for $2 million or more. The tax rate ranges from 1.1% to 2.2%, depending on the value of the property.
- Seattle: In 2019, Seattle implemented a progressive real estate excise tax on the sale of properties valued at $1.5 million or more. The tax rate ranges from 1.1% to 3%, depending on the value of the property.
- Vancouver: In 2016, Vancouver implemented a foreign buyer tax of 15% on properties purchased by non-Canadian residents. In 2018, the tax was expanded to include properties purchased by Canadian citizens or permanent residents who do not live in the province of British Columbia.
What You Need To Know
The mansion tax is required for every purchase beyond this amount, even though the majority of NYC buyers won’t be spending $1 million on a mansion. Also, the NYC mansion tax is nearly impossible to avoid, so you’ll need to be prepared to pay it, unlike some other real estate taxes and closing costs. To assist with paying the mansion tax, you can always request a commission rebate.