Just when you thought we’ve covered all there is to know about New York real estate transfer taxes, including the basics, gifts and leaseholds, the state gave us another reason to bring our attention back to these taxes.
New York lawmakers included a provision in the fiscal-year 2020 budget that increased transfer taxes on multimillion-dollar New York City homes. This came on the heels of some of the largest real estate transactions in the state’s history with Ken Griffin’s closure on a $238 million Central Park penthouse, a record-breaking $77.1 million Upper East Side townhouse sale, and Amazon.com founder Jeff Bezos’ purchase of three apartments at 212 Fifth Ave for a combined $80 million.
Read on to learn how these legislative changes increased the effective tax rates for certain real estate transfers, and introduced a progressive rate structure so that higher-value transactions pay transfer taxes at increasingly higher rates.
Real Estate Transfer Tax
There are currently two New York State real estate transfer taxes. The first is a transfer tax on each conveyance of real property where the consideration is more than $500. This tax, which applies to all types of real property in New York, is charged at the rate of 0.4% and is typically paid by the seller. However, under the law change that took place on July 1, 2019, a higher transfer tax will apply to conveyances of certain real estate occurring within cities “having a population of one million or more” (read: New York City). According to the new law, residential property in these cities with a sales price of $3,000,000 or more and commercial property in these cities with a sales price of $2,000,000 or more, will be subject to additional transfer tax of 0.25% effectively increasing the state’s transfer tax rate to 0.65% with respect to such transactions.
The second transfer tax on conveyances of real property imposed by New York State is the 1% “Mansion Tax,” which applies to sales of residential property where the consideration of the sales is $1 million or more. The mansion tax is payable by the buyer, unless the buyer is exempt, in which case the tax becomes payable by the seller. Under the new law, the state-imposed tax was expanded when the sales price of the property reaches $2 million and continues to rise until it reaches a top rate on sales of $25 million or more. Similar to the real estate transfer tax, the new mansion tax rates apply within cities that have a population of one million or more. See the chart below listing the progressive tax tiers:
|$1M > $2M||1%|
|$2M > $3M||1.25%|
|$3M > $5M||1.5%|
|$5M > $10M||2.25%|
|$10M > $15M||3.25%|
|$15M > $20M||3.5%|
|$20M > $25M||3.75%|
It is important to note that the increased real estate transfer tax and mansion tax rates apply from the first dollar of consideration. So, for example, in the case of a transfer of a residential property in New York City, where the consideration is $4,000,000, the 0.65% real estate transfer tax and the 1.5% mansion tax would apply to the entire $4,000,000 purchase price. It should also be mentioned that New York City real property transfer tax would also apply in this example, as the recent law changes do not have any effect on the local transfer taxes.
In 2018, the existing real estate transfer and mansion taxes have generated about $1.1 billion in revenue for New York. It is estimated that the increased tax rates will generate an additional $365 million in annual revenues for the state’s coffers.
Luckily for Ken Griffin, he finalized his purchase before the tax changes were even proposed. Had he not, Griffin would have paid more than $9 million in mansion taxes, rather than the $2 million he was required to pay under the old rules. Additionally, about $1.5 million in real estate transfer taxes would also have been added to the transaction, compared with $952,000 under the prior rates.
While the number of people purchasing homes in New York at levels directly burdened by the law changes are relatively few, the impact of the higher rates do have broader implications, specifically on businesses in the real estate industry. Conveyances of interests in real property, such as certain transfers of a controlling interest in any entity that owns real property in New York, options to purchase with rights of occupancy, and certain leases are also subject to the new tax rates. As a result of the legislation, it is more important than ever for taxpayers to carefully consider the transfer tax consequences of their proposed real estate transactions. If you have any questions regarding the application of the new transfer tax rates on you or your business, please contact Alan Goldenberg, Principal of State and Local Taxation, at firstname.lastname@example.org or 212-897-6421, or your Friedman LLP tax professional.