If you live in or near Connecticut or New York state, you may have heard about mansion taxes and what they'll mean for home sales in the posh real estate markets of Manhattan or Greenwich. And then, because you don't live in a mansion in either of those states, you dismissed the notion that such taxes would ever apply to you.
Not so fast. Mansion taxes are simply the latest term for a new tier of transfer or deed taxes, which are common in most states. The twist is that more cities and states are now making their transfer taxes progressive. That means they're creating higher transfer tax rates for more expensive homes. So, if you are buying or selling a condo in a hot real estate market that has a so-called mansion tax, it could still apply to you.
States that have these progressive rates are Connecticut, Hawaii and New York, as well as the District of Columbia. In addition, many states allow their localities to levy their own transfer taxes, and some of these places have progressive rates.
There isn't a comprehensive list of all the transfer tax rates by city but it's easy to find out what the particulars are for your own jurisdiction. Just Google the name of your state and "online transfer tax calculator." For now, I can tell you that New York City, San Francisco, Oakland, and Evanston, Ill., all have a progressive transfer tax. What's more, Chicago and San Jose are considering doing the same. Boston has already passed a higher tax rate for pricier homes and is just waiting on the state to approve it.
Transfer taxes work like a sales tax on real estate transactions. Also called a deed, stamp or recording tax, the rate depends on what you're using the property for and the final sale price. The National Conference of State Legislatures keeps a list of transfer tax rates by state. However, it is not updated to include the new, higher rates in New York and Connecticut.
Let's look at how the transfer tax rate can make a big difference in your closing costs.
Most places impose a flat tax rate on residential purchases somewhere between 0.1% and 0.5% of the purchase price. In other words, a $400,000 home would have a state transfer tax levy between $400 and $2,000 included in the closing costs. For a $4 million estate, just add a zero: Taxes would be between $4,000 and $20,000.
Some places have much higher rates. Delaware's is the highest at 4%, meaning a $400,000 home incurs transfer taxes of $16,000, plus all your other closing costs. Michigan, New Hampshire, Pennsylvania, Vermont and Washington state also have higher than average statewide rates.
Now, what about places with progressive transfer tax rates? Old Republic Title's online transfer tax calculator includes several Western states, so it's handy for a comparison tool. The Hauseit transfer tax calculator has tax information for New York localities. It's easy to see how taxes grow in these places by just plugging in different purchase prices into the calculator:
--In San Francisco, taxes on the low end would be $2,720 for a $400,000 property (if such a property exists in that city). A $4 million home incurs $30,000 in transfer taxes, and at the top rate you'd pay $750,000 in transfer taxes for a home worth $25 million.