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Taxation of Real Estate Transfers: The Realty Transfer Tax, Mansion Tax and Other Recent Changes

 

On August 1, 2004, three significant changes became effective with respect to various types of real estate transfers in New Jersey. An increase in the Realty Transfer Tax, the requirement for withholding income tax on sale by a non-resident, and the imposition of the “Mansion Tax” are all expected to have an impact on many New Jersey real estate transactions.

 

The Realty Transfer Tax (also called the Realty Transfer Fee) was amended in July 2003, and just over one year later has been further amended (see N.J.S.A. 46:15-5 et seq., P.L. 2004, c.66). The primary three-tiered system of calculating the tax remains unchanged as follows:

 

Consideration up to $150,000                                     $2.00 per $500.00

Consideration from $150,001 to $200,000                 $3.35 per $500.00

Consideration of $200,001 or greater                        $3.90 per $500.00

 

An additional tax has been imposed on transfers in which the consideration exceeds $350,000. This “general purpose fee” applies from the first dollar of consideration and is calculated as follows:

 

Consideration up to $550,000                                     $0.90 per $500.00

Consideration from $550,001 to $850,000                 $1.40 per $500.00

Consideration from $850,001 to $1,000,000              $1.90 per $500.00

Consideration of $1,000,001 or greater                     $2.15 per $500.00

 

Real estate sales with purchase prices of $350,000 or less are still subject to the same tax imposed as of July 2003. As the purchase price increases above $350,000, the tax increase escalates.

 

The magnitude of the recent increase, and the escalation of the tax as value increases, are evident by the following illustration:

 

Sale Price of Home:             $300,000.00        $355,000.00        $2,000,000.00

Realty Transfer Tax (new)      $1,715.00            $2,783.00             $21,675.00

Realty Transfer Tax (old)        $ 1,715.00             $2,144.00            $14,975.00

Percentage Increase                            0%                     29%                       45%

 

There are also numerous “special cases” that historically exist for purposes of calculating the Realty Transfer Tax. New construction was formerly provided a partial exemption. However, such an exemption no longer exists. Notwithstanding the elimination of this exemption, each deed conveying property with new construction must be clearly marked with the words “NEW CONSTRUCTION” at the top of the first page and an affidavit of consideration must also be filed with the deed.

 

A second class of exemptions has existed (and continues to exist under the new statutory scheme) for transfers by senior citizens, blind persons, persons with disabilities, and for transfers of low and moderate income property. The calculation of this partial exemption remains unchanged.

 

A second major change in the scheme of taxation of real estate transfers in New Jersey is the imposition of the so-called “Mansion Tax”, N.J.S.A. 46:15-5 et seq. This tax applies to all deeds where the land conveyed is “zoned for residential use” and the consideration paid is in excess of $1,000,000. Unlike the Realty Transfer Tax, which is imposed on the grantor (seller), the Mansion Tax is imposed on the grantee (buyer). The amount of tax imposed is a flat one percent (1%) of the consideration stated in the deed. The plain language of the new law applies to all property “zoned for residential use.” Therefore, a single-family home may not be subject to the Mansion Tax if it is not located in a residential zone. Likewise, a property used for commercial purposes may be subject to the tax if located in a residential zone.

 

The third recent change in the taxation of property transfers (P.L. 2004, c. 55) is the requirement that a portion of the proceeds of sale be withheld to pay the Gross Income Tax on the seller’s gain, if the seller is a non-resident individual, estate or trust. The amount withheld must be paid at the time of recording of the deed executed in connection with the sale of such real estate. The amount of the payment is based on the taxable income received by the seller from the sale of the property, and is calculated by multiplying the seller’s gain from the sale by 8.97%, the highest rate imposed by the Gross Income Tax. However, the estimated tax payment may never be less than 2% of the consideration stated in the deed. This payment must be accompanied by a “Nonresident Seller’s Tax Declaration” which states the amount of the tax payment and must be sent to the County Clerk at the time the deed is sent for recording. The recent changes imposing new burdens on many sellers and buyers of real estate in New Jersey will inevitably lead to additional negotiations seeking to shift these burdens. Unless the parties agree on a different allocation, the law will continue to govern who is responsible for paying the Realty Transfer Tax (seller) and the Mansion Tax (buyer).