Who Pays the Mansion Tax In NJ?
The New Jersey mansion tax is generally the buyer’s responsibility. It applies to real estate transactions over $1 million and is set at 1 percent of the purchase price. If a
buyer purchases property for more than $1,000,000, they will owe a minimum of $10,000 to cover the New Jersey mansion tax. This is a hefty closing cost.
The mansion tax applies to Class 2 and Class 4A commercial properties, including residential properties (single-family homes), office buildings, and most conventional commercial properties.
The tax is due when the deed is recorded, when the land is purchased, and when it is paid to the county clerk. However, this responsibility can shift if the buyer and seller agree to do so in their contract.
As with any taxes mandated by law, the buyer must pay the mansion tax. However, since it is a tax on a voluntary transaction, the parties involved have some flexibility in determining the specifics of their agreement.
How Do I Avoid the Mansion Tax in NJ?
As long as you understand its application, several ways exist to avoid or reduce the NJ mansion tax. The simplest method to avoid the NJ mansion tax is to purchase a property for less than $1 million. For example, by offering $999,999.99 for a property that costs $1 million, you can save $10,000 and one penny by avoiding the tax.
Another strategy to avoid the mansion tax involves using fees related to the purchase in the contract.
For instance, if a brokerage fee of $70,000 is charged, it could be incorporated into the seller’s property price. The buyer may agree to pay this fee, which would reduce the property’s contractual sale price by the same amount.
If this reduction brings the price below the $1 million threshold, the mansion tax will not apply, even though the buyer and seller exchange the same amount.
Exemptions From the NJ Mansion Tax
When planning for the mansion tax, it’s essential to understand which purchases are exempt from it.
- Both apartment buildings that house multiple families and industrial sites are exempt from the mansion tax.
- Vacant lots may exceed $1 million in value, but they, too, are exempt.
- Additionally, nonprofit organizations are not subject to this tax.
Controlling interest in someone else’s property
However, the mansion tax is applied differently when the purchase involves a controlling interest in the corporate entity that owns a Class 4A commercial property.
For example, if a purchase of more than $1 million is made for a controlling interest in someone else’s property—without a deed transfer because the property itself isn’t changing hands—the tax is calculated as 1 percent of the payment made by the purchaser for that controlling interest.
A controlling interest is owning more than 50% of the voting power in a company’s stocks.
Another key exemption from the mansion tax applies when a property transfer is exempt from the realty transfer fee. But what is the realty transfer fee?
In New Jersey, purchases of real property (land and buildings) include a graduated tax ranging from 1 percent to 1.5 percent based on the total payment. This tax is based on the value of the land and buildings and any outstanding mortgage payments and related loans.
The seller is typically responsible for paying the realty transfer fee when the deed is recorded. However, it is common for contracts to specify that the buyer may assume this cost. Properties owned by the government or commonly owned properties are exempt from the realty transfer fee. Moreover, older people and disabled buyers may qualify for partial exemptions.
Understanding these exemptions is crucial. They can affect whether the New Jersey mansion tax applies to your property purchase or corporate interest transfer.
NJ Mansion Tax Bottom Line
The NJ mansion tax is a significant fee on high-value residential and commercial properties in New Jersey. Since this tax can amount to tens of thousands of dollars, many buyers seek ways to avoid it. Try to understand which types of properties are exempt and how to structure the property transfer agreement. Therefore, you may circumvent the $1 million minimum tax threshold and avoid the fee altogether.
This guide explores strategies to exempt your contract from the mansion tax. Although the tax may seem unavoidable, you can adjust the specifics of your deal to keep the buyer’s costs the same through separate fees or to negotiate with your broker to make the purchase exempt from this substantial tax.
If you’re interested in finding unique places to settle down in New Jersey, check out our list of the wealthiest towns in NJ.
