New Jersey Raises ‘Mansion Tax’—Here’s Who Is Impacted

An amendment to New Jersey’s so-called “Mansion Tax” is only a few days from going into effect, promising to force sellers in the state to pay tens of thousands of dollars in new fees for sales of properties exceeding $2 million.

What Is New Jersey’s ‘Mansion Tax’?

Under the current legislation, adopted in 2004, all residential properties and some commercial ones selling for more than $1 million in New Jersey are subject to a “Mansion Tax” equal to 1 percent of the purchase price, paid by buyers. The $1 million threshold has remained unchanged for the past 20 years, despite the recent surge in home prices across the country and in New Jersey.

Under the new requirements, contained in Assembly Bill 5804, the burden of the state’s “Mansion Tax” moves from buyers to sellers, who will pay progressive rates for properties sold for more than $2 million. The fee on sales between $1 million and $2 million remains set at 1 percent.

For a sale price over $2 million but below $2.5 million, sellers would face a 2 percent fee—which roughly translates to an additional $40,000 expense. Properties over $3.5 million would see sellers facing a fee hike of up to 3.5 percent.

These are the progressive rates that property sales over $2 million will be subject to:

• Properties costing over $1 million but not more than $2 million: 1.0 percent;
• Between $2 million and $2.5 million: 2.0 percent;
• Between $2.5 million and $3 million: 2.5 percent;
• Between $3 million and $3.5 million: 3.0 percent;
• Over $3.5 million: 3.5 percent.

Transactions affected would include those for commercial real properties, residential properties, certain farm properties with residential structures, cooperative units, and non-deed transfers involving a controlling interest in entities owning real property.

What Would Its Impact On The Market Be?

The tax hike was backed by the state’s Democratic-controlled Legislature, which believes it will generate crucial revenues to support New Jersey’s $58.8 billion state budget and was signed into law by Governor Phil Murphy on June 30. According to state Senator Paul Sarlo, chair of the New Jersey Senate Budget and Appropriations Committee, the “Mansion Tax” is expected to raise $282 million this fiscal year.

After Murphy signed the amendment into law, his office said that this and other changes introduced by the Legislature this year “help ensure that revenues are more closely in line with expenditures.” Even so, the state’s structural deficit is projected at $1.5 billion for the next year, meaning that New Jersey still spends more than it collects in revenues.

While buyers will no longer have to fear the additional fee on top of the property’s price tag, sellers face higher closing costs that might force them to either cut their asking price (a home that would have sold for $1 million could now be priced at $999,999 to avoid the extra tax) or hold their listings. While price reductions would be welcomed by buyers, a reduction of the state’s overall inventory would exacerbate New Jersey’s shortage of homes.

Real estate professionals have been critical of the tax hike, saying that it is likely to hurt the already-struggling New Jersey housing market while offering little relief to buyers. According to real estate industry group New Jersey Realtors, the tax hike would affect only the top 3 percent of property sales in the state.

The new legislation will be applicable to transactions occurring on and after July 10.