Tips & AdviceWhat You Need to Know About the New NYC Mansion Tax

What You Need to Know About the New NYC Mansion Tax

Homebuyers who purchase a piece of property in New York City priced at $1 million or more must pay “mansion tax.” Initially established in 1989, the city restructured the tax breakdown in 2019. Instead of a flat tax, the mansion tax amount now increases proportionally per the purchase price. How does this new structure affect homebuyers?

Who pays the NYC mansion tax?

Although it’s called the “mansion tax,” this tax does not just apply to purchasing mansions. Any homebuyer in New York City who buys a piece of property priced at $1 million or higher must pay the tax. If a buyer purchases a piece of property priced at $999,999.99, they do not have to pay the mansion tax.

The median asking price for a home in New York City as of June 2022 is $975,000. Therefore, many potential homebuyers may look at properties subject to the mansion tax. With the cost of homes on the rise, an increasing number of people will pay this tax when they purchase a home.

How much does the mansion tax cost?

Before 2019, New York City had a flat 1% mansion tax on any deal over $1 million. Amended on March 31, 2019, the new mansion tax states that any deals closed after July 1st, 2019, must follow the new mansion tax structure, which functions as a progressive tax. Under the reformed system, the higher the purchase price, the higher the tax percentage. Therefore, those purchasing a more expensive piece of property must pay a higher tax than those buying on the lower end of the bracket. The tax increases in increments of 0.25% as follows:

Price of Property Mansion Tax Percentage
Under $999,999 0%
$1,000,000 – $1,999,999 1%
$2,000,000-$2,999,999 1.25%
$3,000,000-$4,999,999 1.5%
$5,000,000-$9,999,999 2.25%
$10,000,000-$14,999,999 3.25%
$15,000,000-$19,999,999 3.5%
$20,000,000-$24,999,999 3.75%
$25,000,000 and above 3.9%

How many NYC homes are subject to mansion tax?

As of July 2022, RealtyHop hosts over 22,300 active New York City listings, 44% of which cost at least $1 million. The following chart explains how many listings fall under each progressive tax bracket.

Purchase Price Range Amount as a Percentage
$1,000,000 – $1,999,999 55%
$2,000,000-$2,999,999 17%
$3,000,000-$4,999,999 13%
$5,000,000-$9,999,999 9%
$10,000,000-$14,999,999 2%
$15,000,000-$19,999,999 1%
$20,000,000-$24,999,999 1%
$25,000,000 and above 1%

Of the 9,666 homes which currently fall subject to the NYC mansion tax, over half of them consist of properties between the $1 million to $2 million bracket. Considering that the median home price for an NYC property falls just short of $1 million, the current tax targets homeowners with an average income.

How will the mansion tax affect my closing costs?

When purchasing a property with a mansion tax, buyers should calculate the total amount of tax due when considering their closing costs. Even though the tax was expensive before 2019, the newer structure quickly adds up when purchasing a higher-priced property.

In 2018, the mansion tax for a home that costs $2,500,000 would have been $25,000. Today, that mansion tax comes out to $31,250. An extra $6,250 may not significantly affect the budget of someone who can purchase a high-cost home, but those unprepared to front the cost could be in for a rude awakening.

When is the mansion tax due, and how do buyers pay it?

Mansion tax rolls into a buyer’s closing cost, and buyers must pay it within 15 days of closing. However, most buyers pay the mansion tax at closing time for convenience. The tax must be paid and submitted along with Form TP-584 to New York State.

In most cases, the title company completes the necessary fillings on the buyer’s behalf. If someone purchases a co-op, their real estate attorney will likely handle the filing.

Can buyers avoid paying the mansion tax?

Anyone purchasing a property priced at $1 million or above must pay the mansion tax. However, some creative solutions exist to offset or avoid the tax altogether.

Buyers can ask their broker for a rebate, as some brokers offer up to a 2% rebate on their broker’s commission fee. The rebate can offset the entire cost of the mansion tax and potentially cover additional closing costs.

Strategically adding a rider can help buyers potentially avoid the $1 million purchase price. If the buyer is interested in purchasing additional items in the house like furniture, art, etc., they can deduct the cost of those items from the actual purchase price and then pay them off in the rider. For example, a home listed at $1,050,000 comes with several pieces of furniture valued at $60,000. A strategic buyer can pay $990,000 for the house and add a rider for the $60,000 cost of the additional items, avoiding paying the mansion tax. Buyers should note that they will still have to pay sales tax on the items purchased by the rider.

Another solution is for a buyer to ask the seller to pay the mansion tax. According to the Department of Taxation and Finance, the seller can pay the tax if the buyer does not. In a slower market, a seller may choose to offer to cover the tax if they want to sell their property quickly. Buyers could also offer to pay the seller’s broker fee in exchange for lowering the home price to below the $1 million mark.

Is the mansion tax deductible?

Buyers cannot deduct the NYC mansion tax on their federal income tax return. However, should a buyer sell their home in the future, they will pay less tax on any sales profits. The mansion tax gets included in the property’s base price, and the capital gain from the sale is the difference in the purchase price and base price. Therefore, their capital gain technically decreases, and they pay less tax at the time of the sale.

Where does revenue from the mansion tax go?

The change to the mansion tax structure raises funds for the MTA. When changed in 2019, the state anticipated that the new tax structure would raise $365 million that would go toward the overall goal of completing $5 billion worth of MTA projects.

The MTA’s recent Report on the Calendar Year 2022- 2025 specifies that between 2020 and 2024, the progressive tax and the elimination of the internet tax advantage will raise $10 billion. This $10 billion composes 18% of the budget. Currently, the MTA’s higher budget contributed to averting the potential 2022 fare increase and the resumption of overnight service.

Conclusion

Originally enforced in 1989, the mansion tax first served as a way to put money back into the state’s economy. At the time, the state needed funding, and the Department of Taxation and Finance decided to receive the money from the incredibly rich. A home worth $1 million in 1989 would be $2,357,225.81 in 2022. Today, money earned from the tax gets redistributed toward MTA projects.

Considering the inflation rate more than doubled the cost of a $1 million home, many modern New York City residents feel that the state should raise the minimum threshold accordingly. What once accurately served as a mansion tax now constitutes a tax nearly half of NYC’s homebuyers pay.

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