Monday, February 29, 2016

Legal Line Question: The Mansion Tax

Q: I am a licensed New York state real estate broker and I am representing a purchaser who is considering buying an apartment for $999,999.00. My purchaser is worried that she will be required to pay the Mansion Tax on the sale. Can you please tell me what the Mansion Tax is and whether she will have to pay the Mansion Tax if the apartment closes at $999,999? 
A: The Mansion Tax is a fee paid by the purchaser of residential real property in New York State, when the total consideration is One Million ($1,000,000.00) Dollars or more. Residential real property is defined as "any premises that is or may be used in whole or in part as a personal residence at the time of conveyance, and includes a one-, two-, or three-family house, an individual condominium, or a cooperative apartment unit." The Mansion Tax is equal to 1% of the total "consideration." New York State Tax Law defines "consideration" as the price actually paid or required to be paid for the real property. This amount corresponds with the "amount of consideration for conveyance" listed on Schedule B, Part II, Line 1 of the New York State Real Property Transfer Tax Form TP-584 ("the TP584"). See the illustration below for the relevant portion of the TP-584.
TP584
If the total consideration for the property (as it appears on the TP-584) is for anything less than $1,000,000.00, the purchaser will not have to pay the Mansion Tax. Thus, if the total consideration for the apartment is $999,999.00 the purchaser does not have to pay the Mansion Tax on the sale.
Nonetheless, determining whether the Mansion Tax applies to a particular transaction is not as simple as ascertaining the purchase price for the property. If the purchase price of residential property is less than $1,000,000.00, a purchaser may still have to pay the Mansion Tax because of what is known as "grossed up consideration." In New York, the consideration in a real estate transaction is "grossed up" (increased) if a purchaser agrees to pay the seller’s transfer taxes on the transaction. In this scenario, the transfer taxes that the purchaser has agreed to pay are added to the purchase price as part of the total consideration.
Accordingly, real estate brokers should be aware of the transfer tax implications when the purchase price approaches $1,000,000.00 and the purchaser agrees to pay the seller’s transfer taxes. In such a scenario, the grossed up consideration could increase the total consideration to exceed $1,000,000.00, thereby implicating the Mansion Tax.
In New York City, real estate transactions are subject to both New York State and New York City transfer taxes. The New York State transfer tax is .4% of the total consideration. The New York City transfer tax is 1% of the total consideration if the sale is for $500,000.00 or less and 1.425% of the total consideration for sales greater than $500,000.00.
For example, if the purchase price of an apartment is $999,999.00 and the purchaser agrees to pay the seller’s transfer taxes, then the purchaser will be responsible for $3,999.99 in New York State transfer taxes and $14,249.99 in New York City transfer taxes. The combined $18,249.98 of transfer taxes is added to the purchase price and the total grossed up consideration amount is $1,018,248.98. Thus, the purchaser would have to pay the Mansion Tax on this transaction because the total consideration exceeds the $1,000,000.00 threshold.
Furthermore, if the purchaser agrees to pay the seller’s transfer taxes, the transfer taxes will be re-calculated using the "grossed up" consideration amount, rather than the original purchase price. Thus, in the example above, the transfer taxes would be recalculated using the grossed up amount of $1,018,248.98. This equates to $18,583.04 in combined New York State and New York City transfer taxes.
Important Tip: Please note that because these calculations are complex, you should always consult with an attorney and an accountant when commencing a transaction in which the Mansion Tax may be implicated.

The Legal Line Question by:
Neil B. Garfinkel
REBNY Broker Counsel

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