Is the So-Called “Mansion Tax” Deductible?

The term “mansion tax” is a colloquial phrase referring to state or local taxes that disproportionately affect expensive homes. It is not a formal federal tax designation. Understanding these taxes and their treatment for federal income tax purposes is crucial for homeowners and prospective buyers. This article clarifies their nature and deductibility.

Understanding “Mansion Tax”

The phrase “mansion tax” is an informal term for state or local taxes primarily targeting properties exceeding a specific value threshold. The term typically encompasses two main types of taxes impacting high-value real estate.

One common form involves increased property taxes. Some local governments implement higher property tax rates or assessments for homes above a predetermined market value. This can result in a higher effective tax burden for owners of more expensive homes.

The second primary form is a real estate transfer tax, often specifically labeled as a “mansion tax” in certain areas. These are one-time taxes imposed on the sale or transfer of high-value properties. For instance, New York City has a well-known “mansion tax” that applies to residential properties sold for $1 million or more, with rates increasing on a sliding scale for higher sale prices. These transfer taxes are typically paid at the time of closing the real estate transaction.

Property Tax Deductions for High-Value Homes

Property taxes paid on a primary residence or a second home are generally deductible for federal income tax purposes if a taxpayer itemizes deductions. These taxes are assessed annually by state and local governments based on the property’s value. This deductibility applies even when a “mansion tax” is structured as an increased property tax due to the home’s high valuation.

To claim this deduction, the homeowner must have actually paid the taxes to the taxing authority. If property taxes are paid through an escrow account, only the amount the lender disbursed during the year is deductible. The tax must be uniformly assessed on all real property in the community. This deduction is reported on Schedule A (Form 1040) when itemizing.

Real Estate Transfer Tax Deductions

Real estate transfer taxes, also known as stamp taxes, deed taxes, or conveyance taxes, are generally treated differently from recurring property taxes for federal income tax purposes. These are one-time fees levied by state, county, or municipal authorities when ownership of a property transfers from one party to another. Unlike annual property taxes, these transfer taxes are not deductible as an itemized deduction on a federal income tax return.

Instead, transfer taxes generally adjust the cost basis of the property. For a buyer, the amount paid is added to the property’s cost basis, which can reduce taxable capital gain if the property is later sold at a profit. For a seller, the transfer tax reduces the sales price, which in turn reduces the capital gain realized from the sale. These taxes can vary significantly by jurisdiction, often calculated as a percentage of the property’s sale price.

Limitations on State and Local Tax Deductions

While property taxes can be deductible, a significant federal limitation impacts the total amount of state and local taxes (SALT) that can be claimed as an itemized deduction. The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a cap on the SALT deduction, limiting it to $10,000 per household ($5,000 for married individuals filing separately). This cap applies to the combined total of state and local property taxes, income taxes, and sales taxes paid.

This limitation significantly affects homeowners of high-value properties, especially those in areas with substantial property taxes, as their total state and local tax payments often exceed the $10,000 cap. For tax year 2025, the SALT deduction limit has been temporarily increased to $40,000 under the One Big Beautiful Bill Act, but this increase is subject to income-based phase-downs for higher earners. This temporary cap is scheduled to revert to $10,000 after 2029. Regardless of the actual amount of taxes paid, only up to the applicable annual limit can be deducted.