Understanding the Mansion Tax

According to Wikipedia, a "mansion" is a "very large dwelling." U.S. realtors define a mansion as a dwelling of over 8,000 square feet, whereas a traditional European mansion was defined as a house which contained a ballroom and ten or more bedrooms.

While most homes in Edgemont and Scarsdale do not contain a ballroom, many property owners might feel as if they are taxed like mansions.

If you are lucky enough to afford a home valued at over a million dollars, you should be aware of New York tax law, section 1402-a, which imposes a one percent tax upon the buyer in the purchase of residential one, two or three family homes, including condominium or cooperative units.

This tax is more commonly known as the “mansion tax."

What was originally meant as a tax on the rich has become a tax on the average homebuyer in our area. Even though many homes in Scarsdale and Edgemont priced at $1 million or above would never be considered a mansion, buyers of these homes continue to pay the tax.

The mansion tax was instituted by Governor Cuomo in 1989 as a surcharge for the wealthy. Back in the day, $1 million actually bought you a property that could be called something close to a mansion. Talking dollar value, $1,000,000 in 1989 equals about $1,732,443 in purchasing power today, given inflation trends.

The mansion tax is one percent of a buyer's purchase price, meaning, if a buyer pays $1.1 million for a home, their mansion tax would equal $11,000. Unfortunately, the mansion tax is not tax deductible.

But here is a little something you may not have known about the mansion tax- transfer taxes are sometimes considered part of the purchase price!

Many buyers believe paying just under a $1 million purchase price will eliminate the additional mansion tax cost. In cases, however, where the buyer ends up paying transfer taxes at closing, those taxes get added onto the purchase price, possibly raising the price to over $1 million and thus triggering the mansion tax.

In cases where buyers are purchasing foreclosed properties, short sales, or new construction properties, oftentimes they will be required to pay those transfer taxes. And since those taxes are added on to the purchase price, they can end up with a surprising mansion tax as well.

No other closing costs are considered as part of the purchase price, in regards to determining if the mansion tax is owed.

It’s important to understand how the mansion tax really works. Although this “buyer’s tax” cannot be deducted from income taxes, it can be deducted from future capital gains taxes. The amount of a seller's gain is reduced not only by capital improvements, but by the amount paid in mansion tax. So, like a tax write-off, you can deduct the mansion tax from any capital gains realized upon resale.

In addition, while the law states that the buyer of the property pays the mansion tax, the parties can negotiate and contract otherwise. However, when the buyers go to re-sell the property, they cannot remove the mansion tax from any capital gains.

If buyers are purchasing a property which includes any personal property (i.e., furniture, art, décor), the mansion tax is not applicable to the sale of the portion of that personal property. When a home's contents are included in the purchase price, the parties should allot a value to the personal property and subtract it from the selling price. It must be noted however, that the parties would then be required to pay a sales tax on the sale of such personal property.

It is important to know that the mansion tax is not applicable to vacant land. And in the case of a legal mixed-use property, the tax is calculated based only on the portion of the property, which is considered residential.

Recent news reports detail transactions in which sales prices are falsely recorded. Such activity amounts to tax evasion. Tax evasion can end up costing perpetrators much more than one percent of the million dollar home's purchase price.

The bottom line is that buyers reaching to purchase that million dollar home should talk with a knowledgeable New York real estate attorney about ways to possibly legally reduce their obligation.