Cities and States Look to Tap More Tax Revenue From Expensive Real Estate Sales

Taxes targeting big-dollar and speculative real estate deals are proving to be attractive for politicians in a number of states and cities, offering them a way to generate additional tax revenue when luxury homes and office buildings change hands.

These “transfer” or “mansion” taxes—which are kind of like sales taxes on property transactions—are not a new concept and are on the books in various forms in about three dozen states. But some city and state leaders, particularly in places with hot real estate markets, are now looking to make changes in how the taxes are structured and used. 

Policymakers are eyeing the taxes not only to fill budget holes, but also to address issues they see as tied to rising income inequality. In the Boston area, for example, politicians are seeking to tap the revenue stream from these taxes to address the challenges associated with skyrocketing housing costs, like the lack of affordable rentals. 

“Any trend has to do with an interest in taxing wealthy people,” said Daphne Kenyon, an economist at the Lincoln Institute of Land Policy.

The newer proposals and laws tend to have features like tiered rates that rise with the value of a property sale, dollar amount thresholds under which the taxes do not apply, or other provisions intended to shield certain owner-occupant home buyers and sellers from the taxes.

Boston this month became one of the latest places to move ahead with a new transfer tax plan when the City Council and Mayor Marty Walsh approved a proposal that would allow for transfer taxes of up to 2% of the purchase price for real estate sales that are $2 million or more. 

The city’s plan, which also must be approved by the legislature, calls for funneling the revenues from the tax toward affordable housing initiatives. Neighboring localities, including Concord and Somerville, have similar proposals pending before state lawmakers.

Earlier this year, Chicago’s mayor floated a graduated transfer tax plan, while New York state and Connecticut both changed their policies, imposing higher taxes for more expensive sales.

Kim Rueben, director of the State and Local Finance Initiative at the Urban-Brookings Tax Policy Center, explained that transfer taxes can provide governments with a way to capture additional tax revenues when property values within their jurisdictions swell. But unlike a typical property tax, transfer taxes or fees can be more strategically applied to specific segments of the real estate market. 

Rueben noted that, especially in large cities with expensive housing, the taxes may be seen as “a tool that can be used to try and mitigate some of the wealth inequality.”

"It's sort of recognizing that you have this point when there is a big transaction going on,” she said. “And is there a way to use it to … address public policies that you're concerned about?” 

Estimates Boston came up with suggest that if the city’s proposed transfer tax had been in place in 2017 and 2018, it would have raised north of $140 million in each of those years. 

That sum is not insignificant.

Currently, a main source of revenue for the city’s affordable housing programs are so-called linkage fees that developers pay on certain new real estate projects. Those fees produced only around $40.4 million in total housing funds in the roughly four years between 2014 and 2018, according to a fact sheet about the transfer tax plan.

Lydia Edwards, a Boston city council member who sponsored the tax proposal, said the city has lacked sufficient funds to support affordable housing programs. The transfer tax, she said, would tap into the city’s real estate market while the economy is going strong.

“It allows for us to capture some money from the speculation,” she said. “It brings a lot of developers and the real estate industry to the table to pay a little bit more,” she added. “It basically allows for luxury housing to pay for affordable housing.”

Edwards emphasized that she does not see the tax as a cure-all for the city’s housing challenges, but said that it should help if put in place alongside other policies.

New York state since 1989 has had a “mansion tax”—a 1% tax on the sale price of property that is $1 million or more.

State lawmakers there this year imposed additional graduated rates under that tax program for property within New York City. These rates range from 0.25% for sales between $2 million and $3 million, up to 2.9% for purchases of $25 million or more. 

They also adopted a 0.25% transfer tax increase for residential property sales in the city that are $3 million and above and commercial sales of $2 million and up.

Revenue from these tax increases is supposed to go toward the city’s troubled transit system.

Connecticut currently has a two-tier “conveyance” tax that is 0.75% for residential property sales of at least $800,000 and 1.25% on any portion of the sales price that is above that amount. Under legislation lawmakers passed this year, there will be a new rate of 2.25% on the amount of a sale that exceeds $2.5 million. 

There is a provision that lets Connecticut residents who pay the new tax claim a tax credit against it. But they are not eligible for that rebate until the third year after they’ve paid the tax. In other words, they need to stick around Connecticut to recoup their money—a somewhat notable provision in a state that is seeing its population shrink.

One way to view rate structures that hit pricier property sales with higher taxes is as a penalty on the rich. But Rueben, with the Tax Policy Center, said another way to think about the tiered rates is that they offer a lighter burden for people buying less expensive homes. 

“Giving them a lower rate makes it easier to access homeownership,” she said.

Kenyon, with the Lincoln Institute of Land Policy, pointed out that one pitfall with the taxes is that when they only apply to sales above a certain level, sellers might set prices for property that are just under that threshold to avoid paying the tax.

An Urban Institute report from last year cites research that found when Washington, D.C. in 2006 raised its effective real estate transfer tax rate to 2.9% from 2.2%, for houses sold for at least $400,000, fewer houses were sold at or above that level and more just below it.

For some in the real estate business, transfer tax hikes are unappealing.

Greg Vasil, CEO and president of the Greater Boston Real Estate Board, a trade association, said that commercial developers are already paying millions of dollars to the city in linkage fees.

He noted other affordable housing requirements, like zoning rules that require residential developers to include certain numbers of affordable units in multi-family projects and a property tax surcharge that goes toward affordable housing, as well as other programs.

"People are already paying in,” Vasil said. “You add another fee on the most expensive real estate market in the commonwealth of Massachusetts and it's going to drive costs even higher.”

He said the transfer fee would likely push up rents and other costs for office towers and other commercial real estate in particular.

A report from a consulting firm that was commissioned by the city suggested that transfer taxes may only have “muted impacts” on real estate markets and that “market actors” in the industry “do not appear to be fully incorporating” other comparable transaction costs.

But Vasil said the report is flawed and fails to fully account for the costs for real estate deals in Boston.

“Everybody in the real estate industry here always wondered: ‘How is this boom going to end?’” he added. “This is a perfect example of how we will legislate the end of this up-cycle.”

Vasil also suggested that Boston could run into difficulties trying to build the affordable housing that transfer fee revenues might help pay for. He cited obstacles like opposition to taller and denser buildings, and the high costs for construction and land in the city.

The city itself has made strides building affordable housing, he said. In his telling, projects in surrounding areas would make more sense because costs would be lower. But they run into roadblocks, he said, because some of those places aren’t as development-friendly.

"There's absolutely no question that we have an affordable housing issue in the greater Boston area," Vasil said. "The issue that we struggle with is it should be a regional solution.”

In Chicago, Mayor Lori Lightfoot when putting forward her budget proposal earlier this year called for revamping the city’s real estate transfer tax as she sought to come up with the revenue needed to fill in a deficit projected to be around $838 million.

Property sales in Chicago are now subject to state and local transfer taxes that total 1.2% of their value, including a 0.75% city tax. Lightfoot’s pitch was for a graduated city rate ranging from 0.55% to 2.55%, which her budget plan estimated would raise $50 million in additional revenue in 2020. The rates have been subject to negotiation since the plan was put forward. 

Like Boston, Chicago needs to get the state legislature’s approval to enact the tax policy. That didn’t happen when lawmakers convened for a brief session in the fall. So for now the mayor’s proposal is dormant, although it could get attention when Illinois legislators meet next year.

Some of the debate about the proposal in the state’s capital has centered on whether part of any additional transfer tax proceeds should go toward programs to help with homelessness.

Laurence Msall, president of The Civic Federation in Chicago, said the idea of a progressive real estate transfer tax really only began to gain traction in the past year or so in the city and that Lightfoot was the first mayor to propose the policy. 

“It's following a trend of attempting to raise revenue from perceived higher-income people, or higher-value properties, both residential and commercial,” he said.

Msall pointed out that Gov. JB Pritzker, a Democrat elected in 2018, is advocating for the replacement of the state’s 4.95% “flat” income tax rate with a graduated system. Voters will decide on a ballot measure next November that would allow for that change. 

The Civic Federation hasn’t taken a position on the transfer tax. But Msall raised concerns that the city and the state lack comprehensive plans for dealing with their long-standing financial problems, which stem to a large extent from unfunded pension liabilities.

"There is a willingness among business and civic leaders to pay their fair share and even pay an increase in their taxes,” Msall said.

“But if the tax increase is not going to fix the problem," he added, "then it is not as attractive an opportunity for them." Raising taxes can be an even harder sell, he noted, when revenues won’t be paying for improved services, but instead paying down debts.

If the Massachusetts legislature green-lights Boston’s proposed transfer tax plan, city lawmakers would still need to pass further legislation to enact the policy. 

At that point, they would have to fill in greater specifics having to do with possible exemptions, and whether the tax rate will be 2% for all sales $2 million and above, or if it will rise to the 2% mark from some lower level as deals go up in value.

An earlier version of the proposal would have allowed for a tax rate of up to 6% and an additional fee targeting house “flippers” that would have been triggered if a property was sold repeatedly in two years. But that provision was stripped and the rate was dropped in the final measure. Edwards said the changes were compromises required to get the proposal passed. 

The city council member thinks the proposal has a strong chance of winning approval in the legislature. One reason for her optimism, she said, is that Boston is not alone in seeking the new taxing authority. “A lot of cities want the permission and want the ability and the power to control how much they can extract from a booming real estate market,” Edwards said.

Somerville, located just north of Boston, is one of those places.

Mayor Joseph Curtatone said Somerville, like other places in the region, “is in the midst of a housing emergency." He described rampant real estate speculation, with people buying and renovating homes and quickly re-selling them. 

People are being solicited for their homes to be purchased in cash, with no inspection, he said. Someone selling a home in the city doesn’t need a broker, according to Curtatone. Just list the property online, have an open house and “you’ll have more than 40 people lined up.”

“Someone’s going to pay you probably $100,000 over asking,” he added. “Typically these are speculators.” Curtatone said his mother, who lives in the home where he grew up, gets constant letters from prospective buyers seeking to purchase the house for “cash, as is.”

“It's hard to call any place home when you're facing displacement on a monthly basis,” he said.

Like Boston, Somerville’s plan is for the proceeds from its proposed transfer tax to go toward affordable housing programs. 

Somerville’s plan calls for a fee of up to 2% of the purchase price of real estate.

The proposal includes carve-outs and other provisions that are meant to narrow how it applies. These are designed to exempt certain owner-occupant buyers and sellers, seniors and family members transferring property to one another, while zeroing the tax in on speculators.

Curtatone did not condemn speculators in the real estate business, saying that what they do is part of the free market. But the transfer fee, he said, provides a way for the city to “leverage investment in the speculation market to reinvest back in the community.”