The exodus of families from New York City to Connecticut to escape coronavirus risks may continue making headlines, but our state’s population has decreased for six years in a row, and last year around this time the media was focusing on the trend of residents moving out of state.
Leaving Connecticut will get more expensive beginning July 1 for those selling expensive residential properties when the “mansion tax” adopted last year by the state’s General Assembly takes effect.
This is what’s happening:
- The seller of a residential property pays a state conveyance tax of 0.75 percent on a home’s value up to $800,000.
- The conveyance tax increases to 1.25 percent for the portion of a home’s sales price that exceeds $800,000 but is below $2.5 million.
- As of July 1, the rate for any portion of a residential property’s sales price exceeding $2.5 million rises to 2.25 percent.
- On a property selling for $4 million, the seller will be paying an additional $15,000to the state as of July 1.
Here’s how the state conveyance tax breaks down on a $4 million residential sale with the new three-tier system:
- A tax of 0.75 percent on the first $800,000 in value, which equals $6,000.
- A tax of 1.25 percent on the next $1.7 million in value, which is $21,250.
- A tax of 2.25 percent on the last $1.5 million in value, which equals $33,750—or $15,000 higher than it was before July 1.
- The total conveyance tax on the $4 million sale will increase $15,000 from $46,000 to $61,000.
Critics also refer to the new mansion tax by another name: exit tax.
The increase in the conveyance tax for luxury residential properties is targeted at sellers who are leaving Connecticut. Those who sell high-end homes but remain residents of the state will get back the extra conveyance tax they paid as future income tax credits.
Beginning in 2023, the seller of a home whose value exceeded $2.5 million will be able to claim 1/3 of the higher tax as a deduction each year over three years. On that $4 million sale, for example, the seller would claim a deduction of $11,250 each year.
Sellers who effectively take advantage of the credits will actually be better off than they would before the change in law. All of the tax paid at the 2.25 percent level can now be offset, essentially creating a conveyance tax cap at $2.5 million in value.
Of course, the seller needs to remember to take advantage of the income tax give-back provision and have the necessary documentation in place.
The rising conveyance tax on high-end residential sales in Connecticut represents one of many complexities in the transfer of property, both residential and commercial. For example, the taxes discussed above are state taxes. Real estate transactions are also subject to local conveyance taxes, which generally are 0.25 percent of the selling price, but are 0.50 percent in 18 of the 169 towns and cities in Connecticut.
Cramer & Anderson has a team of real estate attorneys working in our six regional offices with broad knowledge of every aspect of residential and commercial transactions. We’ve been representing individuals, families, and businesses for decades.