June 11, 2018
The mansion tax is a real estate transfer tax imposed by New York State on any sales or transfers of real estate with a sale price of $1 million or more. It was first introduced in 1989 when $1 million obviously bought you a much larger apartment than it does today. $1 million in 1989 would be over $2 million in today’s dollars but unfortunately for NYC buyers, $1 million remains the floor. With the median Manhattan apartment over that threshold, it’s important for buyers to understand the mansion tax.
The mansion tax is calculated as a percentage of the purchase price and the rate increases according to the following table -
|Purchase Price||Mansion Tax Rate|
|$1,000,000 - $1,999,999||1.00%|
|$2,000,000 - $2,999,999||1.25%|
|$3,000,000 - $4,999,999||1.50%|
|$5,000,000 - $9,999,999||2.25%|
|$10,000,000 - $14,999,999||3.25%|
|$15,000,000 - $19,999,999||3.50%|
|$20,000,000 - $24,999,999||3.75%|
|$25,000,000 or more||3.90%|
Anyone who buys a piece of real estate for $1 million or more is subject to the mansion tax. The tax rate is a simple percentage of the purchase price. For example, if you buy an apartment for $1.5 million, you would have to pay $15,000.
Because the mansion tax NYC is paid on the entire value of the property, the difference between buying an apartment for $999,999 and buying another for $1 million is big. That incremental $1 actually costs the buyer $10,001. For that reason, you see very few closings just over $1 million.
You can see this in listing prices as well. On Streeteasy, there are currently 113 listings in NYC between $999,000 and $999,999 while only 17 between $1,000,000 and $1,001,000 and they are all exactly $1,000,000 – presumably expecting to sell below that.
The buyer pays the tax on the sale or transfer and it is due within 15 days of closing. It should be accounted for in your estimated closing costs. While “only” 1%, it can represent a large portion of your total cash outlay if financing.
Unlike the mortgage recording tax, which can be avoided by purchasing a co-op, there’s no way around the mansion tax. It applies on new and resale properties, condos and co-ops. According to the law which created the mansion tax, it is due on the purchase of “any premises that is or may be used in whole or in part as a personal residence, and shall include a one, two, or three-family house, an individual condominium unit, or a cooperative apartment unit.” The law even states that if the buyer is exempt from the tax for some reason, the seller has to pay it. If anyone can think of a way around that, please let us know!
For those readers who are familiar with real estate commission rebates, think of the mansion tax as an anti-commission rebate. The mansion tax is not tax deductible so paying it does not directly affect your tax return. However, it is added to your cost basis. This is as opposed to a commission rebate which is not taxable but reduces your cost basis.
The federal tax code explicitly specifies which taxes are deductible for federal tax purposes – these include state income and property taxes (up to recently imposed limits) – so there’s no opportunity to get creative here – the mansion tax is not on the list.
To put some numbers to that, say you bought an apartment for $1,250,000. Your mansion tax bill would be $12,500. That payment won’t affect your tax bill for the year of your purchase. However, when you go to sell the property, your cost basis will be $1,262,500 – the purchase price plus the mansion tax. So while not immediately deductible, assuming you are able to sell the property at a gain, the mansion tax will shield some of those gains.
Continuing on that point, a commission rebate is the best way to avoid paying the mansion tax but only in borderline situations. Since a commission rebate lowers your cost basis, it can make that $1,010,000 purchase price $989,800 (2% lower) in eyes of the Internal Revenue Service (IRS). It’s obviously important to dot your i’s and cross your t’s but it can be done. At low $1 million price points, receiving a commission rebate can be a material advantage – your incremental 2% buying power becomes 3%. Once you get away from the $1 million threshold, however, there’s not much you can do.
Technically, you could also ask the seller to pay the mansion tax. To avoid making this too confusing, that doesn’t really make sense. Instead of selling their apartment for $1,000,000 and paying the $10,000 mansion tax, the seller would be better off just selling it for $999,999.
You can also attribute part of the purchase price to furniture that comes with the apartment. This has to be within reason though – the IRS is not going to believe you paid $10,000 for the owner’s IKEA bed. It’s also important to remember that you’d have to pay sales tax on any furniture purchased.
In short, if you think there is a way to avoid paying the mansion tax, we highly suggest you run it by your accountant and/or financial advisor to get their blessing.
If you are buying a co-op, the seller’s attorney will collect your mansion tax at closing and send it to the county clerk along with the transfer tax (paid by the seller) and a Form TP-584. If buying real property like a condo or house, your title company will collect the mansion tax and send it in, again with the Form TP-584. The mansion tax due date is technically 15 days after closing but you should plan on paying it at closing (and almost certainly will).
Depending on the specifics of your purchase, you may have additional closing costs. Some material closing costs can be mortgage recording tax, title insurance, transfer taxes, attorney fees and application fees. Yoreevo has a dedicated post on buyer closing costs and a closing cost calculator to estimate them for your transaction.
In 2019, mansion tax rates were increased for properties above $2 million and the rates now increase along with the purchase price (see table above). There had previously been no changes since its implementation in 1989 so we're probably good for a bit.
The changes do not address the most obvious complaint with the mansion tax - that the $1 million floor is outdated. The tax was meant to hit the wealthiest buyers, not the median Manhattan buyer. Raising the threshold would also spare everyone snarky “mansion” tax jokes (although we did like the NYTimes’ proposal to rename it the “Swanky Studio Tax”).
The obvious solution would be to adjust the $1 million for at least inflation or, more fairly, the increase in Manhattan property values since 1989. Unfortunately for NYC buyers, the government has only increased the size of the mansion tax while retaining its scope so for now, buyers will have to wait and see (and pay!).