What's up with New York's Mansion Tax?

The “Mansion Tax” is a New York State tax imposed on the purchase of residential property for $1 million or more, excluding the sale of personal property and most closing costs. The tax requires the purchaser of the property to pay 1% of the purchase price to the state.  This tax applies to transactions for individual condos and co-ops as well as one to three family homes.

Governor Mario Cuomo enacted the mansion tax in 1989 as a luxury tax to increase state revenue.  The tax has survived to this day completely unchanged or updated.  In recent years, many have criticized the $1 million threshold as out-of-date and an imposition on the middle class, citing that $1 million in 1989 represents approximately $1,877,000 today adjusted according to the Consumer Price Index.  Confronting this issue, a few NYS lawmakers have proposed bills to push the threshold from $1 million to $2 million, but the passage of these bills is currently uncertain.

Purchasers of new developments should be careful when considering the implications of a mansion tax.  If a purchaser is required to pay city transfer taxes, then the transfer taxes will be considered part of the purchase price for the purposes of the mansion tax.  Generally, transfer taxes are paid by the seller, but in transactions for new developments, sponsors usually shift the transfer taxes to the purchasers.  For transactions over $500,000, the transfer tax is around 1.425% of the purchase price.  Thus, to avoid the mansion tax for new developments, the purchase price should be under approximately $980,000.

As with almost any tax, people have attempted various methods to circumvent or minimize the mansion tax.  One of the more prevalent strategies is for the purchaser to contract with the seller to share the burden of the mansion tax.  This strategy is completely legal, however, sellers rarely have incentive to consent as their share of the mansion tax would not reduce any capital gains or transfer tax.  Another strategy has been to increase the amount of personal property being purchased in the transaction in order to decrease the purchase price of the real estate.  The purchase of personal property is not included in the purchase price for mansion tax purposes, but redistributing costs to avoid the mansion tax is highly problematic and not advisable.  Aside from a potential IRS audit and a tax fraud conviction, any portion of the sale relating to personal property would still require sales tax to be paid.

There are a few silver linings to the mansion tax though. A purchaser can eventually deduct the mansion tax from any capital gains resulting from a subsequent sale, similar to the way capital improvements can be deducted.  Further, the mansion tax will usually not apply to the transfer of the real estate by gift, devise, bequest, inheritance or transfer by will.

In sum, the mansion tax is something purchasers should keep in mind when looking at properties priced at $1 million or more.  Purchasers looking at new development properties should also be aware that the city’s transfer taxes will be included in their purchase price.  There may be some relief from the mansion tax in the near feature if lawmakers are able to raise the threshold to $2 million.  Regardless, prospective purchasers should consult with their attorney to understand the implications of the mansion tax on their potential real estate purchases.

For further information please reach out to the Manhattan real estate attorneys at the Kanen Law Firm, or call us at 212.922.9099.

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