If you live in or near Connecticut or New York state, you may have heard about mansion taxes and what they'll mean for home sales in the posh real estate markets of Manhattan or Greenwich. And then, because you don't live in a mansion in either of those states, you dismissed the notion that such taxes would ever apply to you.
Not so fast. Mansion taxes are simply the latest term for a new tier of transfer or deed taxes, which are common in most states. The twist is that more cities and states are now making their transfer taxes progressive. That means they're creating higher transfer tax rates for more expensive homes. So, if you are buying or selling a condo in a hot real estate market that has a so-called mansion tax, it could still apply to you.
States that have these progressive rates are Connecticut, Hawaii and New York, as well as the District of Columbia. In addition, many states allow their localities to levy their own transfer taxes, and some of these places have progressive rates.
There isn't a comprehensive list of all the transfer tax rates by city but it's easy to find out what the particulars are for your own jurisdiction. Just Google the name of your state and "online transfer tax calculator." For now, I can tell you that New York City, San Francisco, Oakland, and Evanston, Ill., all have a progressive transfer tax. What's more, Chicago and San Jose are considering doing the same. Boston has already passed a higher tax rate for pricier homes and is just waiting on the state to approve it.
Transfer taxes work like a sales tax on real estate transactions. Also called a deed, stamp or recording tax, the rate depends on what you're using the property for and the final sale price. The National Conference of State Legislatures keeps a list of transfer tax rates by state. However, it is not updated to include the new, higher rates in New York and Connecticut.
Let's look at how the transfer tax rate can make a big difference in your closing costs.
Most places impose a flat tax rate on residential purchases somewhere between 0.1% and 0.5% of the purchase price. In other words, a $400,000 home would have a state transfer tax levy between $400 and $2,000 included in the closing costs. For a $4 million estate, just add a zero: Taxes would be between $4,000 and $20,000.
Some places have much higher rates. Delaware's is the highest at 4%, meaning a $400,000 home incurs transfer taxes of $16,000, plus all your other closing costs. Michigan, New Hampshire, Pennsylvania, Vermont and Washington state also have higher than average statewide rates.
Now, what about places with progressive transfer tax rates? Old Republic Title's online transfer tax calculator includes several Western states, so it's handy for a comparison tool. The Hauseit transfer tax calculator has tax information for New York localities. It's easy to see how taxes grow in these places by just plugging in different purchase prices into the calculator:
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_In San Francisco, taxes on the low end would be $2,720 for a $400,000 property (if such a property exists in that city). A $4 million home incurs $30,000 in transfer taxes, and at the top rate you'd pay $750,000 in transfer taxes for a home worth $25 million.
_In Maui, the transfer taxes on a $400,000 home would be $600. A $4 million estate would be $34,000, and at the top rate, a $25 million estate would run you $312,500 in transfer taxes.
_In Manhattan, taxes for a $400,000 property (again, if you can find one) would run $5,600. On a $4 million home, they'll total $143,000 and for a $25 million dream home, transfer taxes will add nearly $1.5 million to the closing costs.
How do transfer taxes work?
Unlike property taxes, transfer taxes are a one-time deal. Also unlike property taxes, they're not tax-deductible. However, sellers can deduct closing costs, including the transfer tax, from the profit they report to the IRS.
The money goes toward the various things governments pay for: roads, schools and the like. Some places dedicate a certain portion of the revenue for specific community needs, such as affordable housing, in the case of Boston, or the subway system, in New York City.
And who pays these taxes? Buyer, seller or a combination. It's important to know the rules about how much you'll be on the hook for and how much you can negotiate. In some places, the share is negotiable and in other places, the law mandates who pays what. Most transfer tax calculators will include any mandated buyer and seller obligations.
In Hawaii, for example, the seller has to cover all the transfer taxes. Some places exempt first-time homebuyers from paying their portion of the tax. In any case, you should know that the cost of real estate transactions tends to get baked into the market prices. For example, when New York City's new tax rates went into effect in July 2019, it put downward pressure on the housing market because the law mandated that the buyer had to pick up most of the cost of the tax hike.
One last thing: A total of 13 states don't have a transfer tax at all. Alaska, Idaho, Indiana, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Oregon (except in Washington County), Texas, Utah and Wyoming. And Arizona just charges a flat $2 fee for real estate transactions.
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