A 30-year-old tax on what was once considered a huge price for homes may soon spread across the country—and sting some of your wealthy clients.

So far, only two states and one municipality impose a mansion tax, which was created in New York in 1989 to fill state coffers during a recession. But “states and other taxing jurisdictions continue looking for means to generate revenue," said Gail Rosen, a CPA in Martinsville, N.J. "The mansion tax is one that obviously affects the wealthy, which makes it an alternative revenue producer that only affects a few.”

“Cities that house a lot of rich and famous people will most likely be the first to follow suit,” said Anil Melwani, CPA at 212 Tax & Accounting Services in New York.

Mark Weber, a CPA and partner at SobelCo, Woodcliff Lake, N.J., called his state’s mansion tax “ridiculous,” triggered by a price amount set when far fewer homes sold for seven figures. “In many counties in Northern New Jersey, $1 million buys a home, not a mansion,” Weber said.

The Urban Institute points out that although only New York and New Jersey enforce such taxes on luxury home sales, potential mansion tax revenue in California, Massachusetts, Michigan and other states could reach into the billions. The institute analyzed potential revenue in eight states and the District of Columbia from two types of taxes on high-value residences: a real estate transfer tax and a property tax surcharge. A real estate transfer tax falls on the sale price at the point of transaction; a property tax falls on the assessed property value.

Among jurisdictions without a mansion tax, California could take in $4.3 billion to $7.6 billion, followed by Colorado ($1 billion to $1.7 billion) and Massachusetts ($619 million to $1.4 billion), according to the institute.

The New York state mansion tax is 1% on prices of $1 million. The state’s transfer tax is 0.4% for properties under $3 million and 0.65% for those $3 million and up, according to Melwani. The New York City transfer tax goes from 1% to 1.425% for purchase prices of over $500,000.

In New York, the mansion tax and supplemental tax are paid by the buyer. If the buyer doesn’t pay the tax or is exempt, the seller must pay the tax. In New Jersey, the buyer also pays unless the contracting parties agree to shift responsibility for payment.

New York City’s mansion tax went up on July 1. The tax on a sale price of $1 million to $2 million is 1% and gradually increases to 3.9% on a price of $25 million or more. The mansion tax in New Jersey is 1% of the transfer amount for homes selling for more than $1 million. For example, if the sale price of a single family home is $1 million, there’s no mansion tax due,” Rosen said. “If the sale price is $1,000,001, the mansion tax is $10,000.

“Clients can’t avoid these taxes, but they can understand them and anticipate the additional cost,” Weber said. “For example, a couple buying a home in Bergen County, N.J., might be surprised by the mansion tax if the realtor or their financial advisor didn’t warn them. Realtors don’t promote the mansion tax since it could impact the ability to sell a home.”

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