The Million Dollar Mansion Tax Explained
A: A simple question yet one that many buyers get confused about, especially when they are looking to buy into a new development, and the purchase price is right around $980,000 or so. Here in Manhattan, the mansion tax is a state tax payable by the buyer for transactions of property priced $1,000,000 or more. For those familiar with NYC real estate, that ain't no mansion, but the tax is certainly real!
Definition of Mansion: a very large, impressive, or stately residence. An abode or dwelling place.
Alright, I'll take 'an abode or dwelling place' for $200 Alex! A little history for ya. The mansion tax was instituted by Governor Cuomo in 1989 as a surcharge for the wealthy; back in those days $1M actually bought you a property that could be called something close to a mansion. Talking dollar value, $1,000,000 in 1989 equals about $1,732,443 in purchasing power today, given inflation trends (using this BLS inflation calculator). Today, the mansion tax is an accepted closing cost that buyers' know is coming.
But here is a little something you may not have known about the mansion tax; transfer taxes are considered part of the purchase price!
IF THE BUYER IS PAYING THE TRANSFER TAXES AT CLOSING, THIS COST + THE PURCHASE PRICE IS USED IN DETERMINING IF THE MANSION TAX IS APPLIED. IF THE TRANSFER TAX COST + PURCHASE PRICE EXCEEDS $1,000,000, THE MANSION TAX IS OWEDNo other closing costs are considered as part of the purchase price, in regards to determining if the mansion tax is owed. The mansion tax is 1% of the purchase price or 1% of the purchase price + transfer taxes.
As we all know, this little tidbit about the mansion tax only applies for purchases of sponsor units (new development or previously held sponsor unit sales) in which the sell side closing cost of the city transfer tax, is passed down to the buyer at closing.
The Wool Law Group PLLC has a great webpage explaining more details about the New York State Mansion Tax:
* The mansion tax increases a seller's basis for the purpose of calculating capital gains tax. The amount of a seller's gain is reduced not only by capital improvements but by the amount paid in mansion tax. So, like a tax write-off, you can deduct the mansion tax from any capital gain realized upon resale.
* While the law provides that the buyer pays the tax, the parties can contract otherwise. Should the seller agree to pay the tax however, the sales price will not be reduced by the amount of tax paid for the purposes of calculating capital gains tax and real property transfer tax.
* Unless the property is subject to a lien that amounts to $1 million or more, the recipients of real property transferred in the following ways are not subject to the mansion tax: gift, devise, bequest, inheritance or transfer by will. Such transfers are not considered taxable transactions.
* The mansion tax is not applicable to the sale of personal property. If a home's contents is included in the price, the price should be bifurcated into the real property price and the personal property price. It must be noted however, that sales tax is due on the sale of such personal property.
So, can you get out of the mansion tax? Ehh, its not that simple. Falsely recording a sales price so as to avoid the mansion tax equates to tax evasion. Now I am not an accountant or a lawyer, but the phrase 'tax evasion' sounds like something to avoid. With that said, talk to your attorney about purchases that hover right around the $1M mark regarding your options and don't risk punishment by the IRS to save 1% of the purchase price that can be used in your favor to reduce capital gains at resale anyway!
Know your closing costs ahead of time and calculate it into your budget!