Buying, Finance

What You Need To Know About The Mansion Tax

Imagine living in less than 1,000 square feet but still being required to pay an additional mansion tax…doesn’t make sense, right? A recent trend is changing how mansions are defined.

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What Is A Mansion Tax?

Imagine living in less than 1,000 square feet but still being required to pay an additional mansion tax…doesn’t make sense, right? When most people think of a mansion, they typically think of larger square footage homes. And while that is true in almost every scenario, a recent trend is changing how mansions are defined. Almost every state requires transfer taxes when selling a home, but some states are now increasing the transfer tax to a “mansion tax” based on the sales price–not the square footage.

While the mansion tax isn’t ideal, it replaces the pied-a-terre levy annual tax proposal which would include substantial annual lump-sum taxation on luxury homes. The current mansion tax would affect over 25% of Manhattan’s real estate market.

Where Does The Mansion Tax Money Go?

As with any tax, the purpose of the money collected is to benefit the general public. This may include infrastructure improvements, schools, public transportation, park development, etc. For example, New York City’s new mansion tax is expected to collect $365 million a year and earmarked for the city’s subway system. As home prices continue to rise, the cities can expect substantial revenue from the mansion tax; however, as home prices fall in the future, cities will see less revenue.

How Does The Mansion Tax Get Calculated?

States with a mansion tax like New York, already charge all home buyers a 1% tax on home purchases over $1 million; however, with the mansion tax, the tax rate would incrementally increase as the purchase price increases. The mansion tax rate, aimed at luxury homes, will range from 1-4.15 percent. For example, on a $25 million purchase, the tax rate of 4.15% would equate to an annual tax of over $1 million. In addition to the mansion tax, purchases are still subject to regular transfer tax as well.

Who Is Getting Taxed?

While the mansion tax was designed to target the luxury real estate market, in areas such as New York City, small lofts and studios can easily be valued in the multi-million dollar range making them subject to the mansion tax. However, New York is not the only state with a mansion tax. In fact, six other states such as Connecticut, District of Columbia, Hawaii, New Jersey, Vermont, and Washington all levy higher taxes on higher-priced real estate. For sellers in the luxury real estate market, to appeal to buyers balking at the mansion tax, it may mean price reductions to keep the home under the higher taxation thresholds.

What Does This Mean For The Real Estate Industry?

While the average homeowner will not be subject to the mansion tax, they will reap the benefits of this tax. With improved public transit, infrastructure, parks, and more, homeowners at every price point benefit. However, with an additional substantial tax, the luxury real estate market may see longer days on the market or reduced sale prices. In a branch of the real estate market that already has a typically higher number of days on the market, this certainly isn’t welcomed news. However, this isn’t the end of the world for luxury real estate. It may require more creativity and strategy in getting homes sold, but the end result can greatly benefit the general public.

If you’re in the market to find your next dream home, check out our home buying and selling guides!

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Jennifer is an accidental house flipper turned Realtor and real estate investor. She is the voice behind the blog, Bachelorette Pad Flip. Over five years, Jennifer paid off $70,000 in student loan debt through real estate investing. She's passionate about the power of real estate. She's also passionate about southern cooking, good architecture, and thrift store treasure hunting. She calls Northwest Arkansas home with her cat Smokey, but she has a deep love affair with South Florida.

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