New Jersey real estate has appreciated significantly in the last decade and continues to do so. This makes it a hotspot for real estate agents who want to nab high-profile clients. However, unique and relatively new restrictions on real estate transactions in the state of New Jersey have made certain transactions more difficult for wealthy buyers and owners, potentially stalling or even canceling a lucrative deal.
One of these legal developments is the New Jersey mansion tax, which is a unique legislative fine instated by the state of New Jersey on high-profile property purchases. It can affect the speed and status of a high-profile real estate deal, so it's essential to understand what it is, how it works, and how it could affect you, whether you think you might buy, sell, or be the agent for a large property in New Jersey. This brief guide will walk you through it.
Who pays the mansion tax in NJ?
The first thing you probably want to know is who pays the mansion tax in New Jersey and how much it is. The mansion tax applies to real estate purchases over $1 million. It is a 1 percent tax imposed on such purchases, which means that you or your buyer will pay a minimum of $10,000 to satisfy the New Jersey mansion tax.
This 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, this 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.
Exemptions 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.
How do I avoid the mansion tax in NJ?
By understanding the rules of what makes the mansion tax apply to a property transfer, you can come up with creative ways to avoid it.
The first is evident by the tax's primary consideration, which is that it applies to properties of a value equal to or greater 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 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.
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.