How can a purchase price below $1 million trigger the NYC Mansion Tax?
After all, doesn’t the Mansion Tax only apply to purchases of $1 million or more?
We’ll tell you how in this video. I’m Nick at Hauseit, based here in NYC. Check out our website
https://hauseit.com to learn how to save money if you’re buying or selling a co-op,
condo or townhouse here in NYC. So let’s get started!
As you might know, the Mansion Tax is one of the largest buyer closing costs in New York City.
It only applies to purchases of $1 million or more. Unfortunately, this arbitrary threshold
was originally imposed in 1989 and has never been adjusted for inflation. Obviously,
$1 million today no longer buys a ‘mansion’ as defined by 1989 purchasing power.
In fact, $1 million in 1984 is the equivalent of just north of $2.1 million today.
Nevertheless, the presence of the Mansion Tax creates a pricing inefficiency in the NYC real
estate market. Here’s how: for any property priced at or just slight above $1 million,
buyers typically won’t pay more than $999,999, in order to avoid the Mansion Tax.
For example, if you list your home for sale at $1.05 million or
$1.1 million in NYC, chances are that all of the offers you receive will start with a $9.
But as we’ll explain, there’s actually a scenario where a buyer is responsible for
paying the Mansion Tax even if the purchase price is below $1 million.
This might happen the case of a sponsor sale, also known as a new construction condo purchase.
It’s customary when buying new construction for the purchaser to pay the NYC & NYS Transfer Taxes
as well as the seller’s legal fees. There are also other new development
specific closing costs, which vary by building.
Customs aside, who actually pays these closing costs is negotiable,
depending on market conditions.
But, let’s say this new development is doing really well and the sponsor isn’t very negotiable.
After a few rounds of negotiating, you as the buyer have agreed
to pay transfer taxes on the seller’s behalf, with a purchase price of $999,000.
Here’s where it gets interesting. It turns out that the buyer’s payment of
the transfer taxes on the seller’s behalf *does* count as consideration and would
serve to increase the purchase price above the $1mm mark to incur the Mansion Tax.
Broadly speaking, if the buyer pays any of the seller’s costs,
generally it should be deemed consideration for the purchase.
This includes the developer’s legal fees. Admittedly, it’s easier to hide if the buyer
pays the seller’s attorneys’ fees rather than the transfer taxes, but technically the buyer
agreeing to pay either of these closing costs is still payment to the seller and therefore *should*
apply to the purchase price as it relates to determining the applicability of the Mansion Tax.
In conclusion, be very careful if you’re paying just under $1 million for a new construction condo
and you’ve agreed to cover some or all of the sponsor’s closing costs.
Aside from transfer taxes and sponsor legal fees, many large condo buildings require
each buyer to contribute some money towards the purchase of the live-in super’s apartment.
Whether the superintendent’s unit is included in your “consideration”
depends on how the sponsor sells the unit. It’s also customary for a buyer to make
some sort of contribution to the condo’s working capital fund. Generally speaking,
a working capital fund contribution will usually not count towards your consideration
as the money goes to the condo and not the sponsor.
We recommend speaking with your real estate attorney to ensure that the
proposed terms of your purchase won’t trigger the Mansion Tax.