A Guide to the New York state and NYC Mansion Tax

The PropertyClub Team
Sep 5th 2019
Learn everything you need to know about the New York state and NYC mansion tax, from their history to the newly implemented progressive mansion tax in New York City, with rates as high as 3.9% for properties priced over $25 million.

There are some taxes whose labels are quite misleading. For example, those who coined the phrase “Death Tax” would have you believe that this is an attempt to tax a dead man’s last financial resources. An unforgivable action indeed.

In reality, it’s not a death tax at all but an “inheritance tax” applied to a tiny group of multi-millionaires. 

An even more misleading label is New York’s “Mansion Tax.”

NYC’s Mansion Tax for Studio Apts.

This tax applies to buyers who purchase a residential property that costs over $1 million. The last mansion in New York City that sold for a million dollars happened when horse-drawn buggies were plying 5th Ave. 

A more apt title for this tax would be the “Studio Apartment Tax” because for a million dollars that’s about all you can buy in Manhattan. According to real estate research and analytics company NeighborhoodX, the average price per square foot in Manhattan is $1,773. This means that for $1 million you can buy, roughly, a 550 square foot studio apartment – that’s it. Either the tax authorities can’t use a measuring tape, or they are trying to pull one over on everyone.

NYC’s New, Progressive Mansion Tax 

As of July 1, 2019, New York City has received a revised mansion tax courtest of the lawmakers in Albany. While a 1% tax applies to all homes which sell for $1 million or more statewide, NYC "mansions" priced above $2 million will now be taxed at even higher rates. The new tax is intended to help raise funds to improve the city's subways. The NYC mansion tax rates for FY2020 are as follows:

Purchase Price FY2020 Mansion Tax Rate
$1,000,000 - $1,999,999 1.00%
$2,000,000 - $2,999,999 1.25%
$3,000,000 - $4,999,999 1.50%
$5,000,000 - $9,999,999 2.25%
$10,000,000 - $14,999,999 3.25%
$15,000,000 - $19,999,999 3.50%
$20,000,000 - $24,999,999 3.75%
$25,000,000 or more 3.90%

Whose idea was this NYC Mansion Tax Anyway?

It was Governor Cuomo’s father who came up with the Mansion Tax in 1989 when he was Governor of New York. Back then, while you may not have been able to buy a mansion in New York City for $1 million, you could buy a lot more house than you can today. According to the CPI Inflation Calculator, $1 million in 1989 is today worth a little over $2 million

The obvious problem with the Mansion Tax is that it has yet to be adjusted for inflation. There have been efforts to revise the law, however. In 2015, Mayor Bill de Blasio wanted to change the law by keeping the 1% tax, but he would apply it to the sale of properties over $1.7 million. Lawmakers in Albany rejected that proposal.

The Mayor tried again in 2017, this time raising the tax to 2.5% but on properties selling for $2 million and over. Had this passed, it was estimated to generate over $300 million in revenue. Those funds would pay for affordable housing for seniors. This proposal, too, went nowhere.

How to Legally Avoid or Reduce the Mansion Tax

If you plan on buying in New York City, there are several ways to take the bite out of the Mansion Tax.

-Buy a home for under $1 million

The simplest way to avoid the mansion tax is to purchase a home for under $1 million. If you buy a condo or co-op for $999,999 – a dollar under $1 million – you pay no Mansion Tax. However, if you pay one dollar more, rounding up to $1 million, your tax is $10,000. While this may not be an option for everyone, there can be ways to reduce the purchase price below the $1 million threshold if you’re slightly above it. For example, let’s say you’re interested in a condo priced at $1,050,000 that happens to have some furniture you might consider keeping. Your real estate attorney may be able to reduce the purchase price to $999,000 while including a rider to purchase the furniture for $51,000. Alternatively, another option would be offering to pay the seller’s broker fees, which are typically around 6%.

-Get a buyer agent commission rebate

Generally speaking, a 6% commission is applied to the sale of any home in New York and elsewhere in the country. That commission rate is baked into the asking price. However, half of the commission - or 3% - goes to the seller’s broker and the other half goes to the buyer’s broker.

Today, many buyers find their homes on web-based listing sites like StreetEasy. They don’t use a buyer broker. Nevertheless, and quite unfairly, that 3% buyer broker commission will be tacked on even if the buyer doesn’t use one. And guess who keeps all the money. The seller’s broker pockets the entire 6% commission.

To mitigate this problem, buyers can approach a buyer broker and request a “buyer broker commission rebate.” In other words, the buyer approaches a buyer broker, tells them they’ve found a place they want to buy, and asks them to represent them in the transaction.  In return, they will get a portion of the 3% commission, but not the whole thing.

This can save a buyer a considerable amount of money. And for the buyer agent, it's easy money for merely lending their name, and license, to a transaction that they spent little time on.

-Ask the seller to pick up the tab (or at least some of it)

The New York real estate market has experienced a marked turn. It is no longer a seller’s market, particularly at the highest end of the market. An oversupply of super-luxury condos and co-ops have developers quite worried. They are very much open to granting concessions to buyers, much more so than they were just two years ago.

Ask the seller to pay for the Mansion Tax, or at least part of it. In this market, you have a pretty good chance of having sellers say yes to picking up at least part of the tab.

Go Directly to Jail. Do Not Pass Go

To avoid the Mansion Tax, some folks break the law and lie about how much they paid for their property. If caught by the tax authorities, this will put the buyer, and maybe the seller, in the clinker, coupled with a hefty fine. Nevertheless, because this tax is so large, many people take the risk.

Here’s how it works. A buyer and seller agree to a published closing price below $1 million, thus avoiding the Mansion Tax. However, the real final price is above $1 million. The difference between the two is paid “under the table.” The buyer usually pays the seller a little extra above the sales price for going along with the scheme. Some sellers do this to avoid paying income or capital gains tax.

Buyers and sellers should not be tempted to do this. Not only is it illegal, but it’s pretty easy to get caught. Any property sold below market value will quickly raise red flags among the tax authorities who will investigate the transaction. It’s just not worth spending time in jail for a few extra dollars.

Conclusion: The Upside of the New York City Mansion Tax

All is not lost for those who pay the Mansion Tax. There is one rather unique benefit it provides buyers.

As they pull their Murphy bed down from the wall of their studio apartment, they can sleep well knowing they are living among the rarified elite in their spacious New York City mansion.