We like to keep our clients and friends apprised of changes to law and the impact of events. The changes may not affect everyone, we nevertheless provide the information to all of our clients as a courtesy. Governor Murphy has signed a new law which affects New Jersey real estate closing costs.
The Old Law
Sellers Paid: Sellers paid a Realty Transfer Tax (RTT) based on the sale price of the property. The tax rate was based on the sale price and the tax rate increased up to $1,000,000 after which the rate remained a flat 1.21% of the sales price in excess of $1,000,000.
- For example, on a $1,250,000 sale, the Seller would pay a RTT of $12,600. (There were discounts for disabled, blind, low income housing, and for those 62 years of age or older selling a principal residence. So if a married couple sold their primary residence for $1,250,000, as long as one of the spouses were at least 62 years of age, the RTT would be $6,375.)
Buyers Paid: When the sale price of the property was $1,000,000 or more, the law also imposed a flat 1% Mansion Tax on the Buyers at the time of closing. The Mansion tax applied to: Residential property, (1-4 family dwellings), Farmland having a residence on the property, Commercial property, other than industrial or apartments, ie shopping center, office buildings, restaurants, medical or other care facilities, and Co-op apartments .
- For example, on a $1,250,000 sale, the Buyer would pay a Mansion Tax of $12,500.
The New Law
Sellers Pay Both RTT and the Mansion Tax:
Sellers are still responsible to pay the Realty Transfer Tax. There is NO CHANGE to the RTT law, the rates, discounts, etc remain the same.
Sellers now also pay the Mansion Tax.
The new law has shifted the burden of Mansion Tax payments to Sellers. The rate now also changes, depending upon the sale price (as opposed to the flat 1% under the old law).
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- Consideration of $1,000,000.00 to $2,000,000.00: 1% of the entire consideration
- Consideration of $2,000,000.01 to $2,500,000.00: 2% of the entire consideration
- Consideration of $2,500,000.01 to $3,000,000.00: 2.5% of the entire consideration
- Consideration of $3,000,000.01 to $3,500,000.00: 3% of the entire consideration
- Considerations above $3,500,000.00: 3.5% of the entire consideration
For example, on a $1,250,000 sale, assuming no discounts, the Seller would pay the RTT of $12,600 and the Mansion Tax of $12,500, for a total cost of $25,100.
On a $2,250,000 sale the difference between the old law and the new law is more dramatic due to the graduated Mansion Tax rates – the Seller would pay RTT of $24,700 plus the Mansion Tax of $45,000, for a total cost of $69,700.
Beyond real estate, for purposes of Estate Planning, the Mansion Tax also applies to transfers of shares in an entity such as an LLC.
Observation
The new law reduces the burden on Buyers who might be starting out or moving up. It shifts the burden to Sellers who might have less resistance to paying as they might be:
- downsizing and might have profit and proceeds available to pay the tax, and/or;
- selling to leave the State (and not voting in the next election)
Just as Buyers adjusted what they might offer to pay Seller’s under the old law, Sellers will likely adjust their pricing under the new law – to the extent the market will allow.
We hope the foregoing is helpful. Please do not hesitate to contact the office with any questions or concerns. Thank you. – The Visci & Associates Team