New Jersey Mansion Tax

In recent years, property values ​​in the Garden State have increased sharply. Therefore, you may be concerned about New Jersey mansion tax.

If you’re considering buying a house in New Jersey and are concerned about what types of taxes you may be subject to, don’t despair. Our NJ real estate attorney at Curbelo Law is an expert in all real estate matters in the state.

What You Need To Know About New Jersey Mansion Tax In 2024

New Jersey imposes an additional fee of 1% of a property’s sales price on properties that are sold for more than $1 million. This additional fee is known as the “mansion tax.” 

• The mansion tax was introduced in 2004, when the value of the properties was much less than today’s price. 
• Because of this, it was very rare to find home prices that were $1 million or more.
• This tax also applies to some commercial properties.
• Often the estate tax is paid by the buyer at closing, unless the buyer and seller have agreed otherwise.

All of this means that the home buyer would be paying a minimum of $10,000 to satisfy New Jersey mansion tax. This tax also applies to Class 2 and Class 4A properties.

Before we get into more detail about taxes on mansions, we’ll explain property classifications.

Property Classifications In New Jersey

According to New Jersey Code § 18:12-2.2, the following property classifications exist in the state:

1. Class 1: Vacant land. It is the land in its original state and is not actively used for agricultural purposes or for any other purpose. Additionally, it is land in a subdivision that is listed on the market for sale or is held for sale.
2. Class 2: Residential property. They are generally for homes that are designed for the use and enjoyment of no more than 4 individuals. Additionally, it may include residential condominiums.
3. Class 3A: Farm property (regular). This means that:
   • The land, its improvements and the buildings on this property are for agricultural or horticultural purposes. However, it is not rated or assessed under the Farm Land Assessment Act of 1964 (NJSA 54:4-23 1).
   • Improvements of the types listed in the act, including barns, silos, or sheds, are located on land classified as Class 3B, but do not include single-use agricultural or horticultural facilities.
   • The farm houses, land or plots of land where they are located are for agricultural and horticultural use. 
4. Class 3B: Qualified Agricultural Property. It is all land that has been rated and assessed under the Farmland Assessment Act of 1964.
5. Class 4A: Commercial property. They are all properties that generate income that are not classes 1, 2, 3A, 3B, 4B and 4C. For example, shopping malls, restaurants, theaters and others.
6. Class 4B: Industrial property. Land or adaptable improvements thereof for industrial use that are intended for the assembly, processing and manufacture of products from raw materials. 
7. Class AC: Apartments. It is for the use and enjoyment of 5 families or more, including residential cooperatives and mutual housing societies. 

These are some of the most commonly seen classifications in the New Jersey mansion tax. You can find more information in the law § 18:12-2.2 or by consulting our firm.

Is The Tax On Mansions Deductible In New Jersey?

While a mansion tax is not deductible, it can increase a home’s tax base. Because the tax on the mansion is added to the base, this reduces the tax paid on the gain on the sale of the home. 

How Is New Jersey Mansion Tax Calculated?

In January 2005, the law was amended to confirm that even if there is no profit (or the profit is minimal), the seller must pay a sum equal to 2% of the gross consideration.

In addition, the tax on the mansion is paid by the buyer, whose rate will be 1% of the sale price of the property when said price is greater than $1,000,000 USD.

What Homes Are Not Subject To New Jersey Mansion Tax?

Certain properties will be exempt from paying New Jersey mansion tax. These are:

• Schools.
• Churches.
• Properties owned by charities.
• Apartments with 5 or more units.
• Farm properties without existing residence.
• Industrial properties. 
• Vacant land.
• Farm property that qualifies for farmland assessments.
• Cemeteries.

Additionally, some types of transfers may also be exempt from paying this mansion tax. For example:

• Bankruptcies.
• Transfers under the terms of a will.
• Transfers between family members.
• Transfers pursuant to a decree of divorce, property sold for less than $100 if there is no mortgage or correction deed.

Is Vacant Lot Exempt From Mansion Tax In New Jersey?

Vacant land can cost higher than $1 million (depending on your area). However, these may be exempt from paying this tax. 

It should be noted that the tax on the mansion changes if the purchase is for the corporate interest of someone who owns a Class 4A commercial property.

Other Estate Tax Exemptions 

When a property transfer is exempt from a real estate transfer fee, then it will be exempt from the estate tax. 

• The purchase of property (buildings and land) in New Jersey includes a tax of 1% to 1.5% of the payment of any value in the property.
• This includes the value of buildings and land, as well as remaining mortgage payments and all related loans.

Government or common property properties are also exempt from real property transfer fees. Seniors and buyers with disabilities are also partially exempt from this tax.

Any of these exemptions affect whether New Jersey mansion tax applies to your purchase. Therefore, it is important to know what you will be responsible for when making a property purchase or transfer of corporate interest. 

How To Avoid Paying New Jersey Mansion Tax?

To avoid paying the mansion tax you must do one of the following:

1. Buy a property for $999,999 or less, or
2. Get creative for prices slightly above $1 million. For example, negotiating with the seller or reaching an agreement with the seller.

When a property is purchased, at the time the deed is recorded, the tax must be paid to the county clerk. 

To learn more about the NJ property deed and/or quitclaim deed in New Jersey, on our blog you will find everything you need to understand these topics.

Buyers Must Be Prepared At All Times

Although $1 million properties still have significant value, these properties are more common today than they were a few years ago. 

• Currently, the median property cost in New Jersey is $471,719. According to Zillow, this cost increased by 11.8% in one year.
• While $1 million properties are more prevalent these days, some buyers may be surprised to learn that they must pay a mansion tax at closing.
• As a buyer, you need to understand if your new home purchase will be subject to a mansion tax and what you can do about it. 

Although the buyer usually pays the estate tax, in some cases this cost can be mitigated by making provisions in the contract. Therefore, it can be agreed to share the cost or transfer the responsibility to the seller. 

Examples Of Taxes On Mansions In New Jersey

Next, we will see some examples of these taxes in the Garden State:

• Sale of a property for $3 million. This sale will clearly be subject to the estate tax of about $30,000.
• Sale of Class 4A apartments for $5 million. The tax will probably be collected at the rate presented. However, if the properties are shown to be Class 4C apartments, it is possible to appeal and win.
• Sale of real estate with commercial premises on the ground floor. It depends on the evaluator’s classification. If it is 4C, it is exempt from the mansion tax. If it is 4A, the mansion tax is collected when the deed is registered and cannot be appealed.

New Jersey Mansion Tax Experts

The Garden State mansion tax is a hefty fee for some buyers in the state. For this very reason, most buyers try to avoid it.

• As we have seen previously, the most advisable thing would be to navigate around a price less than $1 million when trying to buy a property.
• Although this tax cannot always be avoided, it is possible to find better alternatives.
• Therefore, it is important to have the help of experts in the field. Our Curbelo Law team specializes in real estate matters in the state.
• Attorney Carolina has extensive knowledge on the matter, so she can help all buyers locate their best options when buying a property.

If you would like a private consultation regarding your situation, you may contact us by phone, email, or by scheduling an appointment at our office. The office is located in Ridgewood, New Jersey.