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Los Angeles may not be the only city to receive a “Mansion Tax” this year.
Chicago’s newly elected mayor Brandon Johnson is gung-ho on a proposed real estate transfer tax that would significantly increase the tax on sales of properties priced over $1 million.
Johnson, who took office on May 15, is backing an increase in real estate taxes on million-dollar-plus properties from the existing 0.75 percent tax on all properties purchased by homebuyers to 2.65 percent. The proposed program Bring Chicago Home is estimated to generate $163 million annually to help combat homelessness.
The idea for a transfer tax on properties above $1 million has been floating around Chicago for a few years but was stalled last November when the city council failed to meet a quorum at a special meeting called to discuss the proposal. As a result, it didn’t make the city’s February ballot. It’s unclear at this point when the proposal may be put in front of city council again.
However, now that Johnson is in office and Bring Chicago Home is part of his mayoral agenda, real estate agents may want to prepare for the possible reality of a significantly increased transfer tax on properties over $1 million in the near future. The tax will technically be charged to buyers, but industry players have said it will also end up impacting sellers, agents and market prices.
Illinois Realtors, Neighborhood Building Owners Alliance and The Chicagoland Apartment Association have all opposed the measure. The Editorial Board of the Chicago Tribune likewise has argued that the threshold for the new tax was far too low, threatening the city’s middle class, and its rate of increase too aggressive, potentially harming Chicago’s competitiveness as a city on the national scale.
As Chicago agents gear up for a new reality, here’s what a few agents in L.A. already dealing with their own Mansion Tax advised.
Rework the contract
Paul Salazar | Hilton & Hyland
In order to bypass Los Angeles’s ULA Tax, a 4 percent tax levied against sellers on properties priced above $5 million and 5.5 percent on properties priced above $10 million, some sellers with properties valued just on the cusp of the tax threshold are opting to price the home right at market value — but below the tax threshold — and sell other personal belongings they may also wish to offload in a separate bill of sale to add to their bottom line, Paul Salazar of Hilton & Hyland told Inman.
For instance, if the buyer expresses an interest in art or furniture within the home, the cost of those pieces could ultimately boost the seller’s net takeaway.
“Let’s say in Chicago, a house is worth $1.1 million,” Salazar posited. “They’ll sell the house for $999,000 and then they’ll sell the furniture for $100,000.”
Salazar later clarified to Inman that a seller should avoid knowingly pricing a home below market value and trying to make up for the lower sales price by adding additional personal items for sale into the deal, since it could put them at risk of committing tax evasion.
Or because the tax in L.A. is technically levied on sellers, the seller might stipulate in the contract that they expect the tax to be split with the buyer. If the tax is passed in Chicago against buyers, they could potentially negotiate the same on their end so that the tax is split with the seller.
Consider renting
Rochelle Maize, of Nourmand & Associates, said that some sellers have opted to rent properties out instead of selling them in order to avoid the tax.
If a client can lease that property out for at least two years before selling it in exchange for another one, they could instead qualify for a 1031 exchange and evade the tax that way.
“That would be good advice,” Maize said of the option to lease out a property.
Although most agents probably would not advise a client to rent if they can buy and start putting equity into a home, if and when Chicago’s mansion tax is passed, if there is a chance it could be challenged in court as LA’s has been, a buyer might prefer to see how that plays out first before putting so much extra money into a home purchase that’s taxed heavily.
Buy before the tax goes into effect
Rochelle Maize | Nourmand & Associates
Prior to its going into effect on April 1 of this year, agents across L.A. scrambled to help their clients offload properties so they wouldn’t incur the tax. Agents told Inman at the time that their inboxes were flooded with marketing emails advertising “ULA Tax Sale” or price cuts on properties if they were sold before the new law went into effect.
That’s one tactic real estate agents in Chicago also might try for clients desperate to sell, rather than be faced with the potential reality of a mansion tax that a buyer may request they share the burden of paying. Or buyers may wish to offer some kind of incentive to the seller or agents involved in the transaction — like a larger commission — if they can get the deal done more quickly.
“My advice would be to offer other agents elevated commission rates to sell their properties before that time frame [before the tax goes into effect] is up,” Maize said.
Fight the tax before it’s too late
Stephen Apelian | The Joyce Rey Team
“Fight it tooth and nail and do everything you can to fight it,” said Stephen Apelian of the Joyce Rey Team at Coldwell Banker.
The biggest mistake players in the real estate industry in L.A. made before the ULA Tax was passed was not pushing hard enough against it, Apelian added, but now that it’s been passed, it’s much harder to change it.
“If it’s something that’s being proposed and it’s going to go to a ballot, fight it as best you can,” he said. “Here in L.A., there wasn’t enough of a push during the ‘campaign’ of this tax to fight it, and now that it’s passed, everybody’s trying to fight it.
“[But] it’s like, it’s a little too late.”
Correction: This story was updated on July 28, 2023 with clarification from Paul Salazar on how sellers could sell personal items in a separate bill of sale from the property transaction.
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