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