As of January 2021, the New York City mansion tax is a buyer closing cost, or residential real estate transfer tax imposed on residential real property with a value of more than $1,000,000. The mansion tax ranges from 1% to 3.9% of the purchase price and operates on a sliding scale up to the highest tax rate on transfers reaching $25 million. Any property being purchased even slightly below the $1 million thresholds will not be subject to the mansion tax. If you are seeking to purchase a home in New York City, it is vital to understand the intricacies of the mansion tax, which type of homes will be subject to the tax, and when you will be required to pay.
Cost and Legislations Regarding the Mansion Tax
The New York State Senate and Assembly included in the 2020 budget new revenue legislation, which carried with it an increase on the transfer tax and mansion tax regarding residential property purchases. Before the 2020 budget reform, New York state had previously imposed a transfer tax on the purchase of all real property. The mansion tax imposed on transfers of residential property exceeding $1 million was 1%. The new legislation enacted an additional tax on a sliding scale for residential sales above $2 million, with a top mansion tax rate of 3.9% on properties sold for more than $25 million. The following are specifics regarding the mansion tax rate as effective by 2021:
NYC Mansion Tax Brackets
|Purchase Price||Total Mansion Tax Rate|
|$0 – $999,999||No Tax|
|$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%|
Why a Mansion Tax?
In 1989, Governor Mario Cuomo‘s administration made an effort to assist the New York state budget during difficult financial and economic times. While the tax was meant to solely affect New York’s more wealthy homebuyers who could afford the burden, changes in the New York City real estate market have vastly changed since the inception of the mansion tax.
As the average cost for homes has risen over the last three decades in New York City, it has become more burdensome to purchase a small flat for $1 million while simultaneously attempting to justify such a large real estate transfer tax at closing. Discussion surrounding the mansion tax was first brought up in 2015 by Mayor Bill de Blasio, who suggested raising the minimum price threshold, and again in 2019 when a decision was finalized to make the mansion tax rate a progressive tax, bringing about the first mansion tax reform since 1989. The discussion will most likely be ongoing as New York City real estate continues to grow and the state of New York considers consequence versus affordability regarding an influx or exodus of homeowners in the state.
Who will pay the Mansion Tax?
As previously discussed, anyone purchasing a home of $1 million and up to $25 million will be subject to a tax rate between 1% and 3.9%. Typically, the tax will be paid by the purchaser of the transaction. However, this may be negotiable depending on the arrangement you can make with the sellers. While it is not typically commonplace for the sellers to agree to pay a mansion tax, there is no harm in attempting to negotiate your real estate deal for the best possible outcome of your purchase price. Keep in mind that the mansion tax is not deductible and therefore would garner no capital gains tax payable on the sale, nor would it provide any reduction in the seller’s out-of-pocket cost. Communicate with your broker to determine if it would make sense to request the seller pay your mansion tax.
If there is strong buyer competition for the real property in question, or the listed price is considerably above the $1 million thresholds which would put the property into a higher tax bracket, you will most likely not be able to convince the seller to pay the mansion tax on your behalf. If you are seeking a seller who may be willing to take some of the financial burdens of the mansion tax, you are more likely to be successful if you can find a property that has been on the market for six months or more, one wherein it may be difficult to obtain financing, meaning the seller will have fewer buyers bidding on the property, or if the real estate you are attempting to purchase will require extensive renovations.
Tips for Purchasing Property within the Mansion Tax Threshold
While you may not be able to avoid paying the mansion tax in New York State, there are ways of offsetting and being more thoroughly prepared for the tax upon closure of your property.
- Discuss with your agent the availability of a buyer broker commission rebate. A standard commission refund when purchasing residential property within the confines of the mansion tax could save you $20,000 or more, helping you to regain some of the money that will be payable toward your real estate transfer tax.
- Make sure to keep in mind the mansion tax and factor it into your closing costs before proceeding with the decision to purchase a new home.
- Always make sure you are working with licensed real estate brokers, agents, and attorneys whom you trust to make sure you are getting the best deal and that you fully understand your closing costs at purchase.
Buyer broker commission refunds are common in New York since the seller will typically pay the same regardless of whether an agent is involved on the buyer’s behalf or not. The average New York City real estate commission is 6%, allowing your agent to collect the half that would otherwise have gone to a listing agent and refund a portion to you at closing. Since the cost of the agent is already incorporated into the sales price, the buyer’s broker may be willing to share some of the real estate commission as a rebate.
Paying the Mansion Tax
Technically you will have 15 days post-closing to pay your mansion tax, but most often, the tax will be paid on the day of your closing. If you are working with a title company, they will likely collect your mansion tax on closing day and send it to the county clerk on your behalf, unless you have purchased a co-op, in which case your real estate attorney will coordinate the necessary submission for you.