Mansion Tax Liability
Prior to any of the 2019 changes, the real estate transfer tax included a base tax of $2 for each $500, or fractional part thereof, of consideration. In addition, there was (and remains) an additional tax of 1% of the consideration or part thereof attributable to the residential real property. This 1% tax only applies when the entire conveyance is $1 million or more; this is commonly referred to as the “mansion tax.” The base tax is paid by the seller (grantor), and the mansion tax is paid by the buyer (grantee).
If the seller has failed to pay the base tax or is exempt from such tax, the buyer has the duty to pay the base tax. In such cases, such tax is the joint and several liability of the seller and the buyer.
The liability for the mansion tax is similar with regards to the failure to pay; if the buyer has failed to pay the mansion tax or is exempt from the tax, the seller has the duty to pay the mansion tax. Subdivision (b) of section 1402-a of the tax law has been amended to now include that, when the seller has the duty to pay the mansion tax because the buyer has failed to pay, such tax is the joint and several liability of the buyer and the seller.
New Base and Mansion Taxes
New York has experienced issues in financing upgrades that are needed for the Metropolitan Transportation Authority (MTA). The new transfer taxes could help collect money from individuals who have properties that benefit from the MTA subway system, but do not pay income taxes to New York City or State.
The new transfer tax provisions now include an additional base tax of $1.25 for each $500, or fractional part thereof, of consideration on each conveyance of real property or interest therein within any city in New York having a population of 1,000,000 or more (i.e., New York City). The additional base tax applies to conveyances of residential real property of $3 million or more, and conveyances of $2 million or more on any other property (e.g., commercial buildings). As with the previous base tax, liability of the new additional base tax is paid by the seller.
On top of the additional base tax, New York also added a new supplemental progressive mansion tax of 2.9%, applied when consideration exceeds $25 million. This now creates a maximum mansion tax of 3.9% (1% + 2.9%) for buyers. The liability of the supplemental tax is paid by the buyer as well.
Currently, New York City is the only city in the state with a population above 1,000,000 that will trigger the new additional base and mansion transfer taxes. For purposes of the real estate transfer tax law under section 1402-a, “residential real property” includes any premises used as a personal residence, such as a one-, two-, or three-family house, an individual condominium unit, or a cooperative apartment unit.
Buyer and Seller Beware
CPAs will now need to be aware of four components of the New York transfer tax when clients buy and sell property in New York City: the previous base tax, the new additional base tax, the 1% mansion tax, and the supplemental progressive mansion tax. The new supplemental progressive tax is summarized in the Exhibit.
New Supplemental Progressive Tax
The changes made to New York’s transfer tax system have an even more profound effect as homeowners consider fleeing crowded areas, like Manhattan, for more suburban areas, because of the COVID-19 pandemic. It is important to note that these transfer taxes are not deductible as real property taxes; rather, buyers will add them to the cost basis of the property, and sellers will use the expense to reduce the amount realized on the sale. New York City real estate is historically expensive, and CPAs should be aware of the additional taxes when advising clients who may be negotiating the purchase or sale price of real property.