Did NYC’s Mansion Tax Revision Go Too Far?
The ritziest digs in Manhattan just got pricier. A new progressive mansion tax on homes valued over $1M went into effect across New York City July 1, replacing a flat tax that had been in place for three decades.
When the revision was proposed, some real estate professionals were up in arms, arguing that the new tax would halt an already slowing market for luxury homes across the city. But two months after the new program came into force, the luxury market is still chugging along.
“The new tax is very different from what it was, but it’s probably not going to change anyone’s decision about whether or not to buy one of these properties,” Mazars principal Kyle Wissel said. “For buyers of these kinds of homes, it’s an additional expense, but one that is manageable.”
In 1989, then-New York Gov. Mario Cuomo introduced the state’s first mansion tax — a 1% tax on purchases of all homes valued over $1M. The new tax is progressive, ramping up incrementally for homes with steeper price tags. Homes valued between $1M and $2M will still pay 1%, but homes between $2M and $3M will pay 1.25%, with the rate ticking up to 3.9% for homes worth over $25M.
For New York’s ultra-luxury homes, those tax costs could be staggering. If it had been purchased after July, for instance, Ken Griffin’s record-setting $238M penthouse at 220 Central Park South would have incurred over $9M in mansion taxes alone, to say nothing of the host of other taxes that are levied on massive property transactions in the city.
But the tax could have been much higher. Before he and the New York State legislature settled on the mansion tax plan at the eleventh hour, Gov. Andrew Cuomo had been eyeing a far more drastic “pied-à-terre” tax, which would have been levied every year on homes worth more than $5M that were not the buyer’s primary residence.
Wissel said that while the pied-à-terre tax would have functioned similarly to a property tax, the new plan acts more like a one-time entry fee to the New York real estate market.
“The pied-à-terre tax would have been a deal killer,” he said. “For a $100M dollar luxury condo, 4% every year is serious money.”
Still, the mansion tax seems to have made some impact. After a blitz of luxury sales in June, as buyers rushed to close before the July 1 deadline, sales of luxury homes slumped in July. According to The Wall Street Journal, the total value of sales of homes valued at $2M or more fell from $4.9B in June — an all-time high — to $1.54B in July, the lowest single-month total since 2013, and the lowest July since 2009.
However, Wissel said that the slump is mostly thanks to sales that would have closed in July moving to June, as well as larger economic factors. With the economy flashing signs of an impending recession, buyers are being more cautious about purchasing pricey new homes, he said. Sales on luxury homes have also slowed after the federal government capped deductions for state and local taxes, known as SALT deductions.
“Of course we saw a spike right before the deadline and a slump just after,” Wissel said. “That’s just good tax planning.”
The revenue from the taxes has been earmarked to renovate New York City’s beleaguered transit system. But while the $365M that the new tax is estimated to raise for the Metropolitan Transit Authority will certainly help, it is a far cry from the $9B MTA officials say it will take to modernize the system’s tracks, stations, signals and trains.
Some in the real estate industry objected to the tax on the grounds that it would not be enough to fix the entire transit system — rather than make incremental moves, Wissel said, they wanted to wait for a tax that could cover the entirety of the MTA’s needs.
It is natural for the real estate industry to oppose any new increase in taxes, Wissel said, but it is wrongheaded to think that a plan that couldn’t solve all of the MTA’s struggles was not worth implementing at all.
“It’s naive to think that you can solve all the problems with a single tax,” he said. “Raising much-needed revenue for infrastructure certainly seems a step in the right direction.”
He added that an even higher tax might still have been effective, notwithstanding the slowdown in the ultra-luxury market.
“Because the pied-à-terre tax only applied to a very small percentage of the population, it may not have been unpopular among most voters.”
This feature was produced in collaboration between Bisnow Branded Content and Mazars. Bisnow news staff was not involved in the production of this content.