A higher real estate transfer tax aimed to bolster funding for public initiatives could paint a nightmare scenario for luxury property sales.
At least, that’s what some say the so-called “mansion tax” has brought upon the city of Los Angeles in California.
- The LA measure imposes a 4% tax on properties sold over $5 million and a 5.5% rate for sales valued at or above $10 million.
- That’s in addition to the 0.45% base tax buyers have to pay on Los Angeles real estate sales, according to the county.
One year after taking effect, the policy, known as United to House LA (ULA) raised roughly $215 million to address homelessness and affordable housing. But that’s far short of the projected $672 million.
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Some local real estate agents also say the tax pummeled luxury home sales and demand, while supporters characterized the levy as a “necessary lifeline”.
Californians aren’t the only ones dealing with these taxes. Several other cities and states tax high-value properties. Here’s what you can expect if your city or state imposes a mansion tax.
What is the 'mansion tax'?
A mansion tax is a type of real estate transfer tax for high-value properties, that some states and cities enforce on buyers as part of their closing costs. The ‘mansion tax’ can be somewhat deceiving, as the dubbed tax refers to the price point of a property and not the square footage. So, mansions aren’t the only properties taxed.
In New York, for example, a 1% mansion tax applies to real estate purchases over $1 million. That means you can end up paying a mansion tax on a studio or one-bedroom apartment. But hey, you’ll at least probably get an in-unit laundry.
Those purchasing in New York City will face an additional supplemental tax on real estate properties sold over $2 million, capped at 3.90% for properties sold at $25 million.
As a prospective homebuyer, you’ll pay the one-time tax as part of their overall closing costs, and your state or local government will then use that revenue to fund school infrastructure, road repairs, build affordable housing — or in NYC’s case, fund the city’s subway and bus operating budget.
Do mansion taxes work?
As if the mountain of fees and taxes associated with closing costs wasn’t bad enough for homebuyers, some folks may have to shoulder a mansion tax.
Still, the tax imposed on luxury homes does have several merits:
1. It builds revenue for key services
The mansion tax can be a way to address revenue shortfalls at the statewide or local level.
The District of Columbia, for example, will start taxing homes valued over $2.5 million as part of the 2025 budget. The tax is said to affect about 2,800 single-family homes and condominiums, just 2% of the city’s residences.
The funding will be aimed at public safety, supporting public education, housing, and social justice programs in the community, according to Office of DC Council Chairman Phil Mendelson.
2. The tax promotes a fair state and local tax system
Supporters of the mansion tax say the revenue from the tax levied on high-value properties can help address gentrification, inequality, and affordable housing.
For example, the Los Angeles mansion tax has helped support local initiatives like legal assistance programs for those at risk of eviction and rental assistance for seniors and persons with disabilities.
3. Discourages purchase of second homes
Even those wealthy enough to afford the property tax hike on their new home purchase may be put off by added taxes. Raising the price of a home can potentially discourage investors from purchasing multiple properties that worsen the housing shortage.
Just as the mansion tax has potential advantages, it can have downsides as well.
1. The tax may discourage luxury home-building
It’s been happening for a while now: homebuilders are downsizing. The shift towards creating smaller homes is meant to improve the nation’s inventory of affordable housing. The National Association of Home Builders found that new homes built in 2023 reached the smallest median size in 13 years.
More than a third of builders said they built smaller homes last year, and more than a quarter plan to construct even smaller homes this year, according to the NAHB. The median price of new homes last year was $428,200, down 6% from the previous year.
This can be a good thing for the average homebuyer, but probably not the best outcome for those seeking a luxury home as they’ll have to compete for inventory.
2. Impacts to the real estate industry
Real estate agents in luxury home hot spots like Los Angeles have felt the impact of the mansion tax. Data from Realtor.com show that 138 sales on homes valued over $5 million occurred just before the tax took effect in March 2023, and only two sales for the following month.
The change not only impacts real estate agents as buyers may look to buy elsewhere — but also how builders respond to the shift in demand.
3. Missed the mark on revenue
Bringing back the example of Los Angeles, sometimes mansion taxes might not have the expected results. The City of Angels was expected to raise $672 million in revenue annually but fell rather short at just over $215 million, the city’s housing department said.
Mansion tax in California?
The list of states and cities that currently impose a mansion tax isn’t extensive, but it’s not only California and may grow. Here are some places where you’ll see a tax on a high-value home.
- California: California doesn’t have a statewide mansion tax, however, those purchasing in LA will face a 4% tax on properties sold over $5 million, while properties sold over $10 million will have a 5.5% tax rate.
- Connecticut: In Connecticut, you’ll have to pay 0.75% on the sale of homes under $800,000. The state’s tax increases to 1.5% on homes priced over that threshold, and 2.25% on properties that a priced over $2.5 million.
- District of Columbia: Though not a state, the District of Columbia imposes a mansion tax of $1 per $100 of assessed value of residential properties priced at or above $2.5 million.
- Hawaii: Mansion taxes in Hawaii range from 10% to 20% for properties sold at or over $5.49 million.
- New Jersey: You can expect to pay a mansion tax of 1% on properties worth over $1 million in New Jersey.
- New York: Similar to its neighboring state of New Jersey, New Yorkers will pay a mansion tax of 1% on homes valued over $1 million. However, those in New York City can anticipate paying up to 3.9%, if their home is valued at or over $25 million.
- Vermont: Would-be buyers in Vermont could face a tax as high as 16% for properties sold at $5 million.
- Washington: Homebuyers in Washington can expect a transfer tax of 1.28% on homes sold over $525,000, and 3% for homes sold above $3,025,000.
Mansion tax: Bottom line
As mentioned, the mansion tax can have its fair share of pros and cons. While it can address revenue shortfalls for programs like legal assistance for households at risk of eviction, your city’s transportation system, or even public school funds — levying tax on high-value properties can have some setbacks.
For instance, potential homebuyers can opt to purchase in a neighboring state causing less demand for luxury builds and loss in anticipated revenue.
While imposing a mansion tax on high-value properties is a simple way to tax the wealthy and bring in revenue, you should evaluate how it can impact your community:
- What types of properties will be taxed: residential, second-homes, or commercial properties?
- Will the real estate transfer tax be imposed statewide or at the local level?
- At what price point will the mansion tax kick in?
- How will the funds from the tax be used by your government?
Earlier this spring, Chicago voters shot down the “Bring Chicago Home” ballot measure, which was meant to place a modest transfer tax on properties sold over $1 million.The measure aimed to increase funding to support the city’s homeless services.
The reasons why it failed were mixed: Axios Chicago reported that voters were “confused” because the proposal lacked spending specifics, citizens were concerned about impacts on already struggling commercial real estate, and some saw it as a “money grab” from city leaders.
Since the mansion tax is relatively new, some homeowners have learned to navigate its regulations to save on interest or bypass the tax. If you’re interested in how the mansion tax works in your state or city, speak to your real estate agent and a lawyer as they may find legal workarounds to negotiate a deal with the seller.
For instance, sometimes, co-owners or spouses of a home can divide the property between them at the point of sale. If the mansion tax is triggered at $1 million, it’s possible to avoid the tax by selling each share for $500,000.
When purchasing your dream home, having a real estate agent on your side can help you find the best guidance and advice on closing that deal.
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