The Mansion Tax Cometh: Here’s What You Need To Know

Key Takeaways 

• Taxes on 7-figure home sales are an increasingly popular revenue tool for cities struggling to address a myriad of issues.

• While it’s billed as a “mansion tax,” some initiatives target commercial transactions too.

• LA said its mansion tax would raise $900 million per year. In its first four months, it only brought in $55 million.

Luxury homebuyers and sellers in several North American cities are facing an irksome new challenge that has nothing to do with low housing inventory, high interest rates or overzealous co-op boards. Rather, it’s a new type of tax on seven-figure real estate transactions.  

Within the past year, so-called “mansion taxes” have been enacted in Los Angeles, Toronto and Santa Fe, and placed on the ballot in Chicago, joining other mansion tax jurisdictions including New York State, Connecticut, Washington and Hawaii. Still more cities and states are watching closely as they seek additional revenues.

“In cities that are facing tough choices, there seems to be a groundswell of support for a mansion tax because the perception is it only impacts the rich. But a lot of the research and data shows there’s a negative impact across the market. And the people who are likely to be hurt the most are the ones who can afford it the least,” says Mike Golden, co-CEO of Christie’s International Real Estate and its Chicago-area affiliate, @properties Christie’s International Real Estate.  

Mansion Tax 101  

Many jurisdictions charge a tax on the transfer of real estate. These transfer taxes can be the responsibility of the buyer, the seller or both, and are typically calculated as a percentage of the sales price. A mansion tax is an additional levy, over and above the base tax rate, which is assessed on the sale of high-end property. Most mansion taxes operate on a sliding scale, so the rate increases as the transaction price increases.  

Not surprisingly, many high growth cities across the U.S., including Phoenix, Dallas, Austin, and Salt Lake City not only don’t have a mansion tax; they don’t have any transfer taxes on real estate. Other cities like Charlotte, Denver and Nashville have relatively low transfer taxes. The chart below shows mansion taxes in a number of jurisdictions.  

What’s In A Name? 

Given its name, you would think a mansion tax only applies to residential real estate, but that’s not the case. In LA, the tax applies to any residential or commercial transaction above a certain price, including apartment buildings, offices, retail, hotel, industrial and land. Chicago’s proposed tax would function the same way. And therein lies one of the biggest problems, according to mansion tax opponents. 

“The people of LA never understood what they were voting for,” says Aaron Kirman, CEO of Beverly Hills-based Christie’s International Real Estate AKG. “I guess you could say it was a good marketing job by the measure’s sponsors.”  

A special report published in October in the Los Angeles Business Journal highlights the impact of the so-called mansion tax on the commercial market. In the final quarter before the tax went into effect (1Q2023), commercial real estate sales totaled $2.4 billion. Over the next two quarters, sales volume dropped to $560 million combined, an average quarterly decline of 88%. The market’s sudden illiquidity and uncertainty over property values are now forcing lenders, developers and investors to consider alternatives to LA, the report notes.  

The Numbers Speak For Themselves 

Things aren’t much better in the residential market where uber-luxury sales are down 60%, according to Kirman, one of the country’s top luxury brokers. “The tax forced a standstill in the high-end market, and it’s absolutely killing development. For a city that needs supply so badly, this is having the opposite effect,” he says.  

Most importantly, Measure ULA is not producing anywhere near the revenue that was promised. The plan’s sponsors said it would generate $900 million per year for housing and services to alleviate homelessness. However, the LA Business Journal’s report notes that in its first four months, ULA brought in just $55 million – or less than 25% of projected revenue. 

“The numbers speak for themselves,” Kirman says. 

Unintended Consequences 

In Chicago, the potential impact on commercial property will have another unintended consequence: it could lower assessed values, which are used to determine property taxes. And if commercial assessments go down, residential assessments must go up to cover the difference in the county’s total tax levy. That means all homeowners – not just mansion owners – are likely to see higher property taxes. Crain’s Chicago Business cites a study by the Manseuto Institute for Urban Innovation and the Center for Municipal Finance at the University of Chicago, which estimates that the average Chicago homeowner would see their property taxes increase by 10%, or around $480 per year, if the assessed value of downtown office buildings declines by 40%. Another study reviewed by Crain’s, this one from Boston Consulting Group, already pegs the decline in that range.  

But Chicago is dangling a carrot to voters to get the mansion tax passed. If the measure goes through, the tax rate on purchases under $1 million will actually decrease from .75% to .6%.  

“It’s being framed as a cost savings for middle class homebuyers. But you only buy a home once every 10 or 12 years. You pay your property taxes every single year. So, buyers might save a few hundred dollars in one hand without realizing they’re losing a few thousand in the other,” says Golden.  

Even in cities where the mansion tax applies exclusively to residential purchases, the market is feeling big shocks. Nowhere is this more acute than in Toronto. The city, which is facing a budget crisis, has instituted some of the highest transfer taxes outside of Europe, and that’s on top of a 2% provincial transfer tax. So, for the privilege of purchasing a CA$10 million home (US$ $7.47 million), a Toronto buyer will shell out CA$652,950 (US$487,662).  

“Transactions in Toronto, including luxury sales, are at their lowest point in more than two decades. Now, sellers no doubt will see a lowering of values in high-end properties consistent with the increase in the new land transfer tax,” says Chris Kapches, CEO and president of Christie’s International Real Estate affiliate Chestnut Park Real Estate. “Already, we’re starting to see considerable interest in luxury homes outside the city, in areas unaffected by the tax.”  

The Difference Between $999,999 and $1,000,000

Where do things go from here? Most brokers believe the new tax will severely stress, but not break, the luxury market.  

“At the end of the day, LA is LA. It’s a world class city with incredible weather and a great lifestyle. It’s the entertainment capital of the world and a premier financial hub. So, we can weather this, but there will be pain,” says Kirman.  

In New York, while there has been some level of acceptance since a new structure was adopted in 2019, the mansion tax still has a big impact on the market, according to Shlomi Reuveni, chief strategy officer for the tri-state brokerage firm Christie’s International Real Estate Group. 

New Yorkers “know the difference between $999,999 and $1,000,000 isn’t $1, it’s $10,001. You will almost never see a home sell in New York for exactly $1 million or just over,” says Reuveni.   

The tax also comes into play in New York’s new-construction market, where virtually every transaction is over $1 million. Reuveni explains that developers frequently build the mansion tax into their pricing models and then discount by roughly that amount if they need to incentivize buyers. In the resale market, sellers may offer a credit at closing or pay for parking or storage if they’re feeling pressure to make a deal. 

In Chicago, where a vote on the city’s mansion tax is just a few weeks away, Golden believes the choice comes down to attracting businesses and residents to grow the tax base or taking a bigger slice of a shrinking pie.  

“Chicago has always been a very business-friendly city and a very compassionate city. We shouldn’t have to be one or the other.”  

For more trends and insights, read the 2024 Global Luxury Real Estate Forecast here.