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Mansion Tax: What It Is, Who Pays It, How to Avoid It

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Buying high-value real estate often comes with additional costs, including the mansion tax. This tax is applied when a residential property exceeds a specific price threshold. It is typically set at $1 million or higher. The term “mansion tax” can be misleading as it applies based on property value rather than size or luxury level.

Since real estate taxes can significantly impact the financial viability of an investment, working with a financial advisor can help buyers explore potential tax-saving strategies. 

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What Is the Mansion Tax?

Unlike standard real estate transfer taxes, which apply to all property sales, the mansion tax is triggered only when a home surpasses a certain value. Mansion taxes typically function as one-time fees paid at closing and are calculated as a percentage of the property’s sale price. It can range from1% to over 5%, depending on the jurisdiction. 

Consider the following example:

A buyer purchases a home in New York City for $3 million. New York imposes a mansion tax that starts at 1% for properties over $1 million and increases progressively for higher-priced properties. Based on the purchase price, the buyer would pay the following:

  • 1% on the first $2 million: $20,000
  • 1.25% on the remaining $1 million: $12,500
  • Total mansion tax: $32,500

Who Is Responsible for Paying the Mansion Tax?

The buyer is usually responsible for paying the mansion tax because it is added to the total closing costs of the real estate transaction. Since this tax is due at closing, buyers must budget for it in addition to other expenses like property taxes, attorney fees and title insurance. However, sellers may sometimes offer to cover this expense as part of the negotiation process to attract buyers.

How Can You Avoid the Mansion Tax?

The mansion tax applies to high-value real estate transactions, but there are legal ways to structure a deal to minimize or avoid this tax. Here are three common approaches:

  • Negotiate the sale price: If a home is priced just above the mansion tax threshold, buyers and sellers may negotiate to keep the price under the taxable limit. 
  • Structure the purchase as separate transactions: In some cases, buyers and sellers may structure a sale so that certain items, such as furniture or fixtures, are sold separately from the real estate transaction. This can reduce the recorded sale price, potentially lowering the tax liability. However, such arrangements must comply with tax laws and the standard home appraisal process  to avoid legal scrutiny.
  • Purchase through an LLC: Some buyers purchase property through a limited liability company (LLC) rather than as an individual. In some jurisdictions, corporate real estate transactions may be subject to different tax treatment, potentially providing tax benefits. Consulting with a financial advisor or tax consultant is recommended before pursuing this option.

Which States Have a Mansion Tax?

A homebuyer looking up which states have a mansion tax.

Several states and cities impose a mansion tax, each with different thresholds and rates. The following locations have some of the most notable mansion tax policies:

New York

New York has one of the most well-known mansion tax structures. The state imposes a 1% tax on residential properties sold for over $1 million, with progressively higher rates for more expensive homes.

  • 1% tax for properties between $1 million and $2 million. 
  • 1.25% tax for properties between $2 million and $3 million. 
  • 1.5% tax for properties between $3 million and $5 million. 
  • Rates increase up to 3.9% for properties exceeding $25 million.

The tax applies statewide, but it has the greatest impact in New York City, where real estate prices frequently surpass $1 million.

California

Certain cities in California, including Los Angeles and San Francisco, have mansion tax policies that impose additional transfer taxes on high-value properties. In Los Angeles, the ULA Transfer Tax, passed in 2022, applies as follows:

  • 4% tax for properties between $5 million and $10 million. 
  • 5.5% tax for properties over$10 million. 

This tax is designed to fund affordable housing programs and has significantly increased closing costs for high-end real estate transactions.

New Jersey

New Jersey applies a mansion tax to properties sold for more than $1 million, charging a flat rate of 1% on the total sale price. Unlike New York’s tiered system, New Jersey’s mansion tax remains at 1% regardless of how much the sale price exceeds the threshold.

Connecticut

Connecticut has a real estate conveyance tax that functions similarly to a mansion tax, with higher rates for more expensive homes:

  • 0.75% tax for properties under $800,000. 
  • 1.25% tax for properties between $800,000 and $2.5 million
  • 2.25% tax for properties over $2.5 million. 
  • Properties exceeding $4 million are subject to an additional tax.

Bottom Line

A tax filer reviewing documents to file his taxes.

The mansion tax is an additional cost buyers must consider when purchasing high-value real estate. This tax is meant to generate revenue for housing affordability programs through targeting “luxury” properties, but rising property prices in major cities can trigger it for buyers of modest homes as well. The buyer is typically responsible for paying the mansion tax, although some sellers may negotiate to cover or share the cost. Real estate advisors can provide additional insights into these types of transactions, too.

Tax Planning Tips

  • A financial advisor can help optimize your financial plan to reduce your tax liability. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you want to know how much your next tax refund or balance could be, SmartAsset’s tax return calculator can help you get an estimate.

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