Mansion or not, you may not escape that so-called Mansion Tax
The mansion tax kicks in on apartments priced at $1 million—and now rises incrementally to 4.15 percent on units at $25 million or above.
NYC real estate is full of quirks and anomalies, but nothing makes this as clear as the mansion tax, which kicks in when you buy an apartment for $1 million or more in New York. The fee starts at 1 percent of the purchase price. This state tax, which went into effect in 1989, applies to single-family homes, condos, and co-ops and as a result of changes in the 2019 state budget, it now rises incrementally to 4.15 percent on sales of $25 million or more.
The median sales price in Manhattan has hovered around the $1 million mark for the past few years, and it’s fair to say $1 million doesn’t actually buy you a mansion—for that amount buyers are more likely to end up with a one bedroom—so it’s a closing cost that is being shouldered by the majority of buyers.
The mansion tax, aka New York State Tax 1402-a, can increase your closing costs by thousands, and it’s also possible you may have to pay it on a new development priced below a $1 million, where the buyer pays state and city transfer taxes, pushing the price above the threshold of the one-time levy.
[Editor's Note: This article previously ran in April 2012. It has been updated with new information for April 2019.]
NYC buyers are stuck with the mansion tax
The only way to avoid the mansion tax is to buy a unit under $1 million.
“There’s no such thing as avoiding mansion tax,” says real estate attorney Sandor Krauss, though he admits it can be painful to stomach if you are buying around the $1 million dollar mark. The scaled increases now operate at $2 million and then at various thresholds above that until it reaches 4.15 percent on units at $25 million or more.
Real estate attorney Jerry Feeney points out “there was never any consideration of this tax as a percentage of cost of living. In upstate New York, you could make the argument that a property for $1 million is still a luxury home, but here you can get an alcove studio or a one bedroom.”
Pursuing a buyer’s broker commission rebate
On units close to $1 million, there’s a slim chance of avoiding the tax. In theory, a buyer’s broker commission rebate might just work. Krauss says, “the broker can lower their commission and give that credit to the buyer—that’s a possibility if the broker will agree to do that.” Truth is, that’s unlikely.
Can you ask the seller to pay the mansion tax?
When buyers have the upper hand—like the ability to pay all cash in a sluggish market—it’s possible they can ask the seller to pay the mansion tax but this is rarely successful. The math just doesn’t bear out, especially as the cost is not tax deductible and so has no impact on a tax return.
State and city transfer taxes can trigger the mansion tax
Typically the seller pays the state and city transfer taxes, but in some cases that cost is put on the buyer and is then reflected in the recorded sales price. This happens most frequently in new development and Krauss says it can mean buyers of units below $1 million can find themselves subject to the mansion tax.
“Let’s say you enter into a contract of sale for $990,000, that would avoid the mansion tax in a normal circumstance, but the way new development works is that you take that 1.825 percent which is $18,067.50, and you add that to the $990,000 so now your consideration is $1,008,067.50 and you’re going to pay a mansion tax,” he says.
Using a furniture credit may backfire
You may have heard suggestions a buyer can attribute part of the purchase price to furniture, or art to keep a borderline unit below $1 million, but Krauss warns against it.
“If you are trying to get away with saying, ‘I’ll buy your apartment for $995,000 and then I’ll give you a check for $7,000 for your furniture,’ you may get audited and asked whether you filed a sales tax return on that furniture. It’s one of those ways that people get caught.”
The risks of ducking the mansion tax
Which brings us to the risks associated with trying to avoid the mansion tax.
“The NYC Department of Finance can ask for supporting documentation that subjects you to an audit and if they prove your sales price was more than a $1 million, not only can they make you pay that mansion tax, but they could ultimately issue fines and penalties for not paying it on time,” Krauss says.
The incremental mansion tax, starting at an additional 0.25 percent on units of $2 million or more, comes into effect on July 1st, 2019.
