If you are lucky enough to afford a home valued at over a million dollars, you should be aware that New York Tax Law, Section 1402-a, imposes a 1% tax upon the buyer in the purchase of residential one, two or three family homes (including condominium or cooperative units).
In the boom years, and in New York City, the “Mansion Tax” as it is popularly known, adds a fixed amount to your closing costs, but almost seems outdated today, where homes routinely change hands for more than a million dollars. Promulgated in 1989 when the average price of a New York City apartment was far less than a million dollars, units are routinely more expensive in today’s market, moving the tax from the rich, to a tax on the average home buyer in New York City, the Hamptons, and Westchester County. As credit gets tight, buyers and sellers of million dollar residential real estate may have to consider creative (and legal) solutions to help facilitate the transaction.
When griping about the Mansion Tax, however, consider that it increases the final “tax basis” in the property, and will reduce your capital gain when you sell. So much for the short term solution or salve. More upsetting is that such “mansion taxes,” whether imposed by New York or by another state, are not deductible on the buyers’ federal income tax returns.
Creative real estate brokers, lawyers and their clients might benefit from remembering that the mansion tax is not applicable to vacant land, is reduced in the case of a legal mixed-use property, and is paid on the commercial aspects of the transaction (if applicable). Contract provisions may also ameliorate the effect on the transaction because, while the law provides that the buyer pays the tax, the parties can agree (contract) otherwise. Recall too that the Mansion Tax is not applicable to the sale of personal property.
Bottom line– when you are reaching to buy that million dollar home in Westchester, Rockland or New York City, you should talk with your New York real estate professional or lawyer about ways to legally reduce your obligation.