New Jersey has increased its so-called "mansion tax" and shifted the party who must pay the fee from the buyer to the seller. The tax has a substantial impact on owners of New Jersey real estate, but despite its expansive reach, the language of the amendment leaves room for strategic planning.
Background
In New Jersey, the mansion tax, unfortunately, applies to more than just the mansions. "Mansion tax" is a misnomer because it applies to Class 4A commercial properties as well as Class 2 residential properties, and even certain Class 3A farm properties containing buildings suited for residential use.
New Jersey first introduced the mansion tax in 2004 as a way to generate revenue from high-value real estate transactions, where the buyer of certain real property valued in excess of $1 million was subject to paying a flat fee of 1% of the purchase price.
Amendment to the Mansion Tax
The amendment to the mansion tax creates an incremental structure of fees based on purchase price, with the fee imposed being 1% on any sale exceeding $1 million but not in excess of $2 million. After which, the fee increases incrementally based on the purchase price of the property:
- If the property sold exceeds $2 million but is not in excess of $2.5 million, the fee imposed is 2%.
- If the property sold exceeds $2.5 million but is not in excess of $3 million, the fee imposed is 2.5%.
- If the property sold exceeds $3 million but is not in excess of $3.5 million, the fee imposed is 3%.
- If the property sold exceeds $3.5 million, the fee imposed is 3.5%.
Originally, the mansion tax placed the burden of the fee on the buyer. The amendment, however, shifts this burden to the seller and completely changes the dynamic of the tax. The shifting of this burden will have a cascade of effects. These effects will not only impact sellers and negotiations with buyers, but also negotiations with realtors and listing agents. Now, sellers have to account for not only the listing agent’s percentage commission of the purchase price, but also an additional 1% – 3.5% fee that did not previously exist. The impact of this amendment significantly increases the cost of real estate transactions.
The amendment to the mansion tax also amends the controlling interest transfer tax (CITT) in an identical fashion, closing a potential loophole for those holding property by way of corporate entity. CITT requires that any sale of a controlling interest in an entity directly or indirectly possessing an interest in “classified real property” is subject to a tax upon selling a controlling interest. This tax is the burden of the seller and based on the equalized assessed value of the property, with the tax percentage mimicking the tiers in the amended mansion tax. This tax can be incurred upon one transaction or a series of transactions, and transactions occurring within six months of each other are presumed to be a series of transactions constituting one sale or transfer.
Timeline
- The fee structure imposed by the amendment takes effect immediately and applies to transfers of real property or controlling interests on or after July 10, 2025.
- Any transfer of real property occurring before November 15, 2025 pursuant to a contract fully executed before July 10, 2025 shall have the difference between the amount in excess of 1.00% and 1.00% refunded to the grantor by the filing.
So, there is a brief window of respite where sellers are hit less hard by the amendment to the mansion tax but nonetheless do not avoid its enforcement.
Strategic Planning
There are some exceptions to the amendment of the mansion tax and the CITT, but overall, it is all-encompassing and has a substantial impact on owners of New Jersey real estate. Despite its expansive reach, the language of the amendment leaves room for strategic planning. For example, “classified real property” under the CITT is limited to certain commercial property. This distinction creates an opportunity that allows for certain properties to be placed in a corporate entity, the corporate entity to be sold, and because there is no deed of conveyance, neither the mansion tax nor the CITT is triggered.
[View source.]
