ShareMansion taxes have been a major real estate talking point for high-end real estate agents and buyers alike over the past several months. Transfer taxes like the mansion tax aren’t exactly new; these one-time taxes or fees are typically imposed by the state, local, or federal government when someone purchases a property. So, how are mansion taxes different? And how do they affect buyers today? Here’s what real estate agents need to know.
What Are Mansion Taxes?
A mansion tax is a progressive real estate transfer tax that comes into play when properties sell for above a certain sum. The home buyer pays the tax, which is a set percentage of the cost of the home, but the exact percentage may vary by state. For instance, in California, buyers may pay as much as 4% tax on properties listed above $5 million and 5.5% on properties listed above $10 million. Meanwhile, in New York, buyers may shell out between 1% to 3.9% of their home purchase price on properties listed above $1 million.
The term "mansion tax" may suggest large, sprawling homes and luxury properties – but the tax is applicable to any property, including condos, co-ops, or studio apartments. The tax is triggered by the purchase price of the property rather than the size.
Where Do Mansion Taxes Apply?
Seven U.S. states currently levy mansion taxes on high-priced home sales. Mansion taxes can be progressive, and they vary from state to state, so the tax burden to the buyer depends not only on where they're buying their home but also on the specific price.
- California:
While there’s no statewide mansion tax in California, L.A. voters have approved Proposition ULA (United to House L.A.), which affects property sales in the city. Properties sold above $5 million are subject to 4% tax, while properties valued at over $10 million are subject to a 5.5% tax. - Connecticut:
Sellers pay around 2.25% on properties that cost more than $2.5 million. - District of Columbia:
Mansion taxes come to 1.45% on properties priced at $400,000. - Hawaii:
Expect to pay anywhere between 10% and 20% for property sold at over $5.49 million. - New Jersey:
Anticipate a mansion tax of about 1% on homes and other property costing over $1 million. - New York:
Mansion taxes in New York City range from 1% to 3.9% on property sales of $1 million or more. - Vermont:
Buyers hoping for property in Vermont may pay as much as 16% tax on real estate priced at $5 million. - Washington:
Transfer taxes in Washington state apply to homes sold for more than $525,000. Expect to pay 1.28% for homes priced at $525,000 and around 3% for homes sold for $3,025,000.
The burden of mansion taxes may fall on buyers in some states and sellers in others. The two parties may mutually divide transfer taxes between them, though this may come down to effective negotiation or seller concessions. For real estate professionals seeking to enhance their negotiation skills, the Real Estate Negotiation Expert (RENE) certification through NAR may be a valuable certification to acquire.
Strategies to Navigate Mansion Taxes
While transfer taxes have been around for a while, mansion taxes usually affect people selling or purchasing properties above the average or median home sale prices. From understanding state laws for clarity on who pays the tax to identifying ways to navigate these expenses, well equipped real estate agents can support clients as they consider their options. While solutions will need to take state law into consideration, here are some tips that may work well for the recent California mansion taxes and could be supportive strategies for other regions.
Sell Below the Minimum Taxable Amount
Since LA home sales of over $5 million incur the tax, sellers with properties valued around that number may want to lower their asking price slightly. Bringing down the price may make it easier to find a buyer and process a sale without triggering the mansion tax. Sellers looking to get rid of a property quickly may be amenable to lowering their asking price rather than waiting months and years for a suitable buyer. That said, it's important for agents to keep market value and trends in mind before recommending a lower asking price.
Divide the Property
Spouses or co-owners of a home may divide the property between them as tenants in common (also known as fractional interest ownership.) Each tenant can then sell their share to the same buyer for around half the value of the home. If the home is valued under $10 million, it's possible to avoid the tax by selling each share for under $5 million.
Leverage Seller Carryback
Real estate agents will be familiar with seller carryback sales in which the seller helps the buyer finance the sale. By acting as the lender/financer, sellers can choose an interest rate that balances out the loss incurred by a lower selling price. This approach may not be for everyone, but it could work seamlessly for wealthier clients.
Advising Clients on Mansion Taxes
As the implementation of mansion taxes in California is relatively recent, agents will likely need to spend some time understanding how new regulations apply and are enacted. Not every client will be affected by mansion taxes, and some may be willing to pay them to complete a desirable sale. That said, for agents and sellers who want to find effective workarounds, it may be important to work with a lawyer to understand how any attempt to mitigate the tax may play out and avoid legal repercussions.
Additionally, new regulations and the news cycles that accompany them may push sellers to make emotion-driven business transactions such as sell well below market value or avoid selling altogether in hopes of a reversal of the tax ruling. In such instances, it may help if real estate agents to step in and provide guidance on the best course of action based on market trends.
Mansion Taxes for Real Estate Agents
Understanding how mansion taxes work in your state and which clients are most affected might be the top priority for many agents. It may help to keep up with changing regulations and observe precedents set by other sales to best understand how to serve your clients. Clients with less experience purchasing expensive homes may require more guidance than those buying their second or third property.