How to help clients prepare for the mansion tax
What was once a big price for homes may soon snag some of your clients with a relatively new tax. So far, only a few jurisdictions impose a mansion tax, an additional surcharge on homes sold for prices above a certain threshold.
As localities scramble for more sources of revenue, this tax – which supposedly targets only a tiny, yet wealthy slice of the taxpaying public – may catch on nationwide.
Home sales are tempting targets for taxation: Values are easier to measure than, say, interests in a business; homes also generally can’t be moved or easily transferred, unlike securities or accounts.
Proponents say mansion taxes level the tax playing field, dinging buyers of posh homes and generating money for schools, roads, and affordable housing. As an aside, the nation’s first mansion tax, in New York City, was created in 1989 in the depths of a recession to fill public coffers. The Urban Institute estimated that some states stand to bring in billions through the tax, especially those with well-heeled cities such as New York, Massachusetts, and California.
What is a mansion tax?
Your clients are familiar with property taxes, usually levied as a flat percentage of a property’s assessed value regardless how high the value. Income taxes, of course, have a rate that rises with income, and most real estate deals also incur a transfer tax.
Localities tend to levy mansion taxes – which travel under different names – on homes that sell above a certain price.
Here are some examples:
- New Jersey: A gradually increasing transfer tax applies different rates to homes less than and more than $350,000, plus a 1 percent tax on homes sold with a value of more than $1 million.
- New York: A flat real estate transfer tax, plus an additional 1 percent of the property’s sale value is assessed for sales of residences worth $1 million or more. Residential properties bought and sold in New York City only are subject to an incremental rise on purchase prices of $2 million or more, to 3.9 percent for properties sold at $25 million or more (that includes the New York state tax).
- Connecticut: A transfer tax of 0.75 percent kicks in for homes valued at less than $800,000, then 1.25 percent for homes valued at $800,000 to $2.5 million. Starting in July 2020, the rate increases to 2.25 percent on sale prices exceeding $2.5 million.
- Hawaii: “Conveyance” taxes gradually increase based in a property’s sale value, from $600,000 to $10 million (as much as $1.25 per $100 of the purchase price for the latter).
- Vermont: The transfer tax applies 1.25 percent to the portion of the property valued above $100,000.
- District of Columbia: Legislation upped the Real Estate Deed Recordation Tax and the Real Property Transfer Tax on the recording of certain commercial and mixed-use real estate transfers and security interests. The total combined rate on certain real estate transfers is 5 percent.
- Washington: The state’s transfer tax now has sharply higher graduated increases for homes sold that are worth $1.5 million and up.
Tax jurisdictions are also looking at graduated property taxes, which, unlike home sales, would produce steady, annual tax income on expensive homes. Analysts have also estimated that a nationwide tax of 1 percent on homes worth more than $1 million could generate almost $50 billion annually in federal tax revenue (although many states have measures prohibiting such a sweeping measure).
So, who pays?
In most parts of the country, the seller is usually responsible for paying the tax. In the District of Columbia, the buyer and seller pay transfer tax. In Hawaii, the tax is taken out of the profit of the sale and the seller must pay transfer taxes at closing. Elsewhere, the buyer and seller negotiate who pays, or split the costs.
Some of these taxpayers confront a reality of years of boom real estate markets: What was once a mansion’s price tag no longer necessarily buys a mansion, especially in markets such as the New York area. In New York City, $1 million in fact falls short of the median price for a home.
How can you help clients who might stumble into this tax when buying or selling a home? Some pointers:
- Realtors don’t necessarily volunteer information about mansion taxes, since doing so might hurt a sale.
- If the home price is borderline, segregate, if possible, anything that comes with the sale, such as furniture.
- Long-term capital gains can be another factor in the sale of expensive homes.
- Encourage your client to buy or close as soon as possible, and to buy for the long term.
You can easily advise your clients on the mansion tax if you know any kind of life changes they are going through, such as buying a property. This also will establish your role as your clients’ trusted advisor.