If the total consideration for the property (as it appears on the TP-584) is for anything less than $1,000,000.00, the purchaser will not have to pay the Mansion Tax. Thus, if the total consideration for the apartment is $999,999.00 the purchaser does not have to pay the Mansion Tax on the sale.
Nonetheless, determining whether the Mansion Tax applies to a particular transaction is not as simple as ascertaining the purchase price for the property. If the purchase price of residential property is less than $1,000,000.00, a purchaser may still have to pay the Mansion Tax because of what is known as "grossed up consideration." In New York, the consideration in a real estate transaction is "grossed up" (increased) if a purchaser agrees to pay the seller’s transfer taxes on the transaction. In this scenario, the transfer taxes that the purchaser has agreed to pay are added to the purchase price as part of the total consideration.
Accordingly, real estate brokers should be aware of the transfer tax implications when the purchase price approaches $1,000,000.00 and the purchaser agrees to pay the seller’s transfer taxes. In such a scenario, the grossed up consideration could increase the total consideration to exceed $1,000,000.00, thereby implicating the Mansion Tax.
In New York City, real estate transactions are subject to both New York State and New York City transfer taxes. The New York State transfer tax is .4% of the total consideration. The New York City transfer tax is 1% of the total consideration if the sale is for $500,000.00 or less and 1.425% of the total consideration for sales greater than $500,000.00.
For example, if the purchase price of an apartment is $999,999.00 and the purchaser agrees to pay the seller’s transfer taxes, then the purchaser will be responsible for $3,999.99 in New York State transfer taxes and $14,249.99 in New York City transfer taxes. The combined $18,249.98 of transfer taxes is added to the purchase price and the total grossed up consideration amount is $1,018,248.98. Thus, the purchaser would have to pay the Mansion Tax on this transaction because the total consideration exceeds the $1,000,000.00 threshold.
Furthermore, if the purchaser agrees to pay the seller’s transfer taxes, the transfer taxes will be re-calculated using the "grossed up" consideration amount, rather than the original purchase price. Thus, in the example above, the transfer taxes would be recalculated using the grossed up amount of $1,018,248.98. This equates to $18,583.04 in combined New York State and New York City transfer taxes.
Important Tip: Please note that because these calculations are complex, you should always consult with an attorney and an accountant when commencing a transaction in which the Mansion Tax may be implicated.
The Legal Line Question by:
Neil B. Garfinkel
REBNY Broker Counsel
Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP