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New York State Mansion Tax

by Alissa Joy Wool

Pursuant to New York Tax Law Section 1402-a, the state collects a 1% tax from buyers who purchase a one, two or three family home or an individual condominium or cooperative unit for $1 million or more. Furthermore, the real property must or may be used as a personal residence. The "Mansion Tax" as it is popularly known was promulgated in 1989 when the average price of a New York City apartment was far less than the million dollar mark it has reached today. What was meant as a tax on the rich has become a tax on the average homebuyer in our area. Homeownership often times seems entirely cost prohibitive to some when the mansion tax is factored into the home buying budget.

The outlook on mansion tax is not entirely dim however for six reasons.

First, mansion tax increases a seller's basis for the purpose of calculating capital gains tax. The amount of a seller's gain is reduced not only by capital improvements but by the amount paid in mansion tax.

Second, mansion tax is not applicable to vacant land. A residential real estate transaction can be structured so as to buy a piece of real property separately from the home.

Third, in the case of a legal mixed-use property, the mansion tax calculation is based only on portion of the property personal residence portion of the property. Mansion tax will not be applicable to the commercial portion.

Fourth, while the law provides that the buyer pays the tax, the parties can contract otherwise. Should the seller agree to pay the tax however, the sales price will not be reduced by the amount of tax paid for the purposes of calculating capital gains tax and real property transfer tax.

Fifth, unless the property is subject to a lien that amounts to $1 million or more, the recipients of real property transferred in the following ways are not subject to the mansion tax: gift, devise, bequest, inheritance or transfer by will. Such transfers are not considered taxable transactions.

Sixth and finally, mansion tax is not applicable to the sale of personal property. If a home's contents is included in the price, the price should be bifurcated into the real property price and the personal property price. It must be noted however, that sales tax is due on the sale of such personal property.

Recent news reports detail transactions wherein sales prices are falsely recorded. Such activity amounts to tax evasion. Tax evasion can end up costing perpetrators much more than 1% of the million dollar home's purchase price. Instead rely on the counsel of a skilled residential real estate attorney to navigate through the law's intricacies. Perhaps a little legal creativity will make palatable what might at first seem impossible.

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