Buyer Beware. With the home values increasing each year we might see more homes on Long Island sell for over $1 Million within the next few years. While this is great for sellers, the buyers are required to pay an additional mansion tax to New York State. If the buyer refuses to pay, the onus might be on the home seller.
In 1989, the original Mansion Tax rate of one percent of the sales price was proposed by Governor Mario Cuomo who believed that this extra tax on wealthy homeowners would lessen the tax burden on lower-income New Yorkers. The Mansion Tax became law on April 1, 1989, on April Fool’s Day and it is a really cruel joke. Back then this tax affected a very small group of home buyers. Today, we are starting to see more transactions being affected by this Mansion Tax. It is no longer a tax on a smaller group of people as we continue to see home values increase. With inflation and the increase in home values, this Mansion Tax may affect the average New Yorker very soon.
In 2019, the New York State Legislature introduced new progressive tax rates that increase the rate as the sales price is higher. If you cross the $1 Million threshold, expect to pay mansion taxes between 1% up to 3.9% of the sales price as illustrated in the table above to the right. The obvious way to avoid this Mansion Tax is to pay a dollar less than $1 Million. If you pay $999,999 for a property, you do not pay this extra tax. Some very ill-advised buyers will separate the amount above the $999,000 as personal property purchase. For example, a buyer on paper will purchase a home for $999,999 and have a separate purchase agreement to purchase, for example, all the light fixtures for $200,000. This practice is highly illegal because you are defrauding the government of their tax revenue.
The median sales price for homes sold in Smithtown for past six months was $712,000. Prices of homes continue to increase at a record pace. Although we are in February with freezing temperatures, the offers keep pouring in. We continue to get buyers coming from New York City making offers substantially above the asking prices. These offers are often more than the Realtors and bank appraisers believe the homes are valued at. Homes are selling for much higher than a year ago.
If you find yourself purchasing a home for more than $1 million it is important to calculate all taxes and closing costs before agreeing on the terms. There is also the New York State Transfer tax that the homeowner is responsible to pay. In some circumstances. The seller may also be willing to pay the Mansion Tax.
Hector Gavilla is a New York State Real Estate Broker and Licensed Real Estate Instructor, with nearly 20 years in the field. A Suffolk County resident, he is currently office manager at a local real estate brokerage. For any real estate questions or column ideas, please email [email protected]
