New Jersey Mansion Tax Guide

May 8th 2024
The New Jersey mansion tax is a one percent fee that applies to sales of properties over $1 million. As such it is also often referred to as the NJ millionaire's tax on real estate. Here's what you need to know about the mansion tax, who pays it, what exemptions exist, and how you can avoid or mitigate it.

hash-markWho Pays the Mansion Tax In NJ?

The New Jersey mansion tax is typically paid by the buyer. It applies to real estate purchases over $1 million. It is a 1 percent tax imposed on such purchases, which means that if buyer purchase real estate for more than $1,000,000 they will pay a minimum of $10,000 to satisfy the New Jersey mansion tax.

The New Jersey mansion tax applies to both Class 2 and Class 4A Commercial properties. This includes residential properties (including single-family homes), office buildings, and most conventional commercial properties.

When the land is purchased, at the time the deed is recorded, the mansion tax is due to be paid to the county clerk. This can change, however, if the buyer and seller have contractually agreed to shift this responsibility. As with any taxes mandated by law, the mansion tax has to be paid. Since it's a tax on a voluntary transaction, however, the parties involved have some room to decide the particulars in their contract.

hash-markHow Do I Avoid the Mansion Tax in NJ?

There are several ways to avoid or reduce the NJ Mansion tax as long as you undersand how it is applied. The best way to avoid the NJ mansion tax is to simply purchase a property for less than $1 million. By offering $999,999.99 on a property that costs $1 million, you can save $10,000 and one penny by avoiding the tax.

Another way to avoid the mansion tax is by cleverly using fees related to the purchase in the contract. For instance, a brokerage fee of $70,000 could be incorporated into the seller's price of the property.

The buyer may agree to pay this fee in exchange for reducing the property's contractual sale price by the same amount. If this puts it below the $1 million mark, the mansion tax doesn't apply even though the buyer and seller paid each other the exact same amount.

hash-markExemptions From the NJ Mansion Tax

Since the mansion tax is large enough to plan for, it helps to know what kinds of purchases are exempt from it. Purchases of apartment buildings that house multiple families or industrial sites are both exempt from the mansion tax. Vacant lots can run up over $1 million depending on the land area, but they are also exempt. Nonprofit organizations are also exempt.

The mansion tax changes if the purchase is for an interest in the corporate entity of someone who owns a Class 4A commercial property. In other words, if a $1 million purchase is made on a controlling interest in someone else's land or building, though no deed is transferred because the property isn't changing hands, the mansion tax works differently.

In this case, the tax is equal to 1 percent of the consideration paid and payable by the purchaser of a controlling interest in the Class 4A commercial property if the interest transfer is greater than $1 million.

Controlling interest refers to a corporate entity that controls more than 50% of the voting power in the company's stocks.

The last big exemption is when a property transfer is exempt from the realty transfer fee. In that case, it is also exempt from the mansion tax. What is the realty transfer fee?

The purchase of real property (land and buildings) in New Jersey includes a graduated tax of 1 percent to 1.5 percent of the payment on anything of value on the property. This includes the value of the land and buildings, which also takes into consideration the remaining payments on mortgages and related loans.

The seller must pay the realty transfer fee when the transferring deed is recorded. However, it is not uncommon for a contract to specify that the transfer fee's burden is shifted to the buyer instead. Commonly owned or governmental properties are exempt from realty transfer fees. Seniors and disabled buyers are also partially exempt from the tax.

Any of these exemptions impact whether the New Jersey mansion tax applies to your purchase, so it pays to know what you'll be responsible for when you make a transfer of corporate interests or purchase a property.

hash-markNJ Mansion Tax Bottom Line

The NJ mansion tax is a hefty fine on high-profile residential and commercial properties in New Jersey. Since it can be tens of thousands of dollars, many buyers want to avoid it. With an understanding of what kinds of properties are exempt and how to shift the property transfer deal, you can potentially navigate around the $1 million minimum rule of the tax and not have to pay it.

Use this guide to get ideas on how to make your contract exempt from the mansion tax. Even though it seems like a certainty, you have the power to change your deal's specifics to pay the buyer the same amount in separate fees or negotiate it with your broker to make the purchase exempt from this hefty tax.

If you are interested in discovering unique places to settle down in Jersey, make sure to take a look at our list of richest towns in NJ.