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Mansion taxes are on the ballot. How do they work?
As much of the United States struggles with housing affordability, some states and local governments believe one solution is an extra tax on those who buy and sell expensive homes. A “mansion tax” is an additional one-time real estate transfer tax imposed on high-price property sales.
The term mansion tax is a bit of a misnomer. The higher tax rate is based on the property’s selling price, not its square footage or luxury features. If the selling price is above a specified amount, the extra tax applies, whether it’s a studio apartment or an estate that rivals Buckingham Palace.
Mansion taxes have been popping up on ballots throughout the U.S. Recently, Chicago voters rejected an extra tax on real estate sales above $1 million aimed at funding services for unhoused people. However, voters in Los Angeles and Santa Fe, N.M., have approved similar measures.
How do mansion taxes work?
When a property is bought or sold, many state or local governments impose a transfer tax. The transfer tax is a typical part of closing costs. A mansion tax is an extra transfer tax on sales that exceed a certain amount, and it is usually assessed to pay for infrastructure and address issues like housing affordability.
At least 17 U.S. cities and counties had so-called mansion taxes as of early 2024, according to the Institute on Taxation and Economic Policy (ITEP). In total, they raise nearly $3 billion annually for state and local governments. The mansion tax is becoming more popular — of those 17 cities and counties, 16 have been passed or expanded since 2018. The ITEP reports that mansion taxes are under consideration in over a dozen other communities nationwide.
Either the buyer or the seller may pay mansion taxes on a home sale, depending on state or local law. Like other closing costs, the matter of who pays any type of transfer tax, including mansion taxes, is usually negotiable.
Many mansion taxes are graduated, which means the tax rate increases as the sale price increases. When they’re levied at gradually increasing rates, mansion taxes look similar to federal income tax brackets, which tax higher levels of income at similar rates. Most states that assess an income tax also use a progressive system.
Pros and cons of mansion taxes
Supporters of mansion taxes say levying an additional tax on high-price home sales addresses inequality through state and local taxation. The bottom 20% of earners tend to pay a larger share of their incomes in property taxes and sales taxes compared to the highest 20%.
Those who favor mansion taxes also say communities of color were historically excluded from housing and that assessing an additional tax on high-price homes is a step toward addressing a legacy of housing discrimination.
But opponents contend that the extra tax stifles development, forcing developers to consider areas that don’t assess a mansion tax. They argue that mansion taxes could inadvertently make housing even more expensive and lead to higher property taxes across the board.
Critics also point to the many ways buyers and sellers have found to skirt mansion taxes. After mansion taxes took effect in Los Angeles on homes selling for $5 million or more, many sellers listed their homes for just under $5 million to avoid the tax. Others used tactics like dividing single properties into two lots and selling them separately.
Read more: How the mortgage interest tax deduction works
Examples of states and cities that levy a mansion tax
Here’s a look at how mansion taxes work in several jurisdictions throughout the U.S. This is not an exhaustive list, but it should give you a good idea of how mansion taxes work in major areas.
Connecticut
Connecticut charges a 2.25% tax rate to the portion of any sale that exceeds $2.5 million. For example, if you sold a home for $3.5 million, you’d pay lower tax rates on the first $2.5 million of the sale. But you’d pay the highest tax rate of 2.25% on the remaining $1 million of the sale.
Hawaii
Hawaii’s mansion tax is somewhat complicated. There are seven sales price brackets. In each bracket, Hawaii residents pay a lower tax rate on sales than non-residents. Usually, a seller is responsible for mansion taxes. A Hawaii resident selling a property for less than $600,000 would pay a transfer tax of 0.1%, while a non-resident would pay 0.15%. Rates gradually increase until they hit the maximum of 1% on a $10 million sale for Hawaii residents or 1.25% for non-residents.
Los Angeles
The Los Angeles mansion tax took effect April 1, 2023, after voters approved Measure ULA, aimed at tackling housing affordability and providing help for people at risk of homelessness. The extra tax applies to both residential and commercial properties. Sellers pay an additional 4% tax for properties that fetch between $5 million and $10 million and an additional 5.5% tax if the property sells for over $10 million.
New Jersey
Sellers in New Jersey are in charge of paying the standard transfer tax, but if there’s also a mansion tax, buyers are the ones who pay the additional fee. Buyers typically pay an additional 1% tax if they purchase a home for $1 million or more. The tax applies to residential properties, as well as most commercial properties.
New York State
The state of New York charges residential real estate buyers an extra tax on sales of $1 million. The surcharge starts at 1% if you buy a home for $1 million to $2 million but gets progressively higher, capping out at 3.9% if you purchase a property for $25 million or more.
Learn more: First-time home buyer programs in New York
Santa Fe, N.M.
In November 2023, Santa Fe voters overwhelmingly approved an extra 3% tax on buyers who purchase a home for more than $1 million. The surcharge will only apply to the portion of the price that exceeds $1 million. So if you bought a home for $1.1 million, you’d pay 3% of $100,000, or an extra $3,000. The new tax is scheduled to take effect May 28, 2024.
Washington State
The state of Washington uses graduated tax rates on home sales. The tax on sales of $525,000 or less is 1.1%, while properties that sell for above $3.025 million are taxed at 3%. The seller is typically responsible for the tax.
Read more: What to know about a first-time home buyer tax credit in 2024
Should you worry about mansion taxes?
Mansion taxes can come into play even if you’re buying or selling a relatively small home — especially if homes in the area have rapidly appreciated in price. Be sure to consider all closing costs, including transfer taxes and applicable mansion taxes, if you’re thinking of buying or selling a home.
